Question

7. A company earned $30.00 per share and paid out $16.00 in dividends to shareholders. The company's expected return on equity is 17.0%. The company expects to maintain the same dividend payout ratio. A. Calculate the future growth rate of earnings (X.X%). (9 points) Given a Required Rate of Return of 14.0 % , Calculate the Stock Price ($X.XX): (9 points) B. If the company's stock is currently trading at $300, would you invest in it? (3 points) C. 8 A company's stock price is currently trading at $80 when it announced that it will cut its dividend for next year from $8.00 to $6.00 per share. Prior to the dividend cut, the company expected to grow at a 3% rate , but announced that it now expects to grow at 5%. A. Calculate the Required Rate of Return (X.X%): (9 points) B. Calculate the company's expected Stock Price after the announcement ($x.xx): (9 points) c. Calculate the expected % decline in the stock's price based on your previous answer (X.X%): (4 points) D. If the company's stock sank to $65 after the announcement, would you invest in it? (3 points)

Answer 1

tu ROE = 171 7) Given. Earnings Pes Share : $ 30 einidend paid $16 Sie Return on equity ROE = 14). Dividend payout Ration(OPR) - dividend paid Co.) Earnings per share (EPS) $16 = 0.53 $30 A) future granth rate of earnings (q) = ROEX [1- DPR) = 17). [1 -0.53) - 7.9.1 B) Required rate of return () = 14% stock price Dr - $16 = $262.29 (Ag) (14% - 7.9.1.) OR=eerlegg tegel. c) If stock is trading at $300 that is $300 $262.29 No, I would not invest as the stock is overvalued

8) current price Po=480 Dividend D = 48 Dividend D - $6 growth rate - 9.- 37. growth Rate = g, = 5% A) Required Rate of return de e using pinidend a Doxli+go+ gi discount mode PO - $8 *(1+3440) + 5). $80 $8.24 +51. - 15.30. $80 B. Expected stock price :P, = Di = $8124 (or-gi) $8 = $6 $58.25 108.25 (15.3.1-51 1 price = 80-58.25 = 27.18% 80 c. % decline in stock Po-P, Ро Not To. I will not invest as $58.25 $6 5 which means the stock is overvalued after the announcement