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Capital Valuation Methods

1. A stock had a price at the beginning of the year of $100 and was selling for $102 at the end of the year. If the total shareholder returns were 5 percent, then the cash dividend per share must have been what?

2. A firm with a 50 percent debt ratio faces a 40 percent tax rate and pays a 10 percent interest rate on its debt. If the return on assets is 20 percent the return on equity will be what?

3. If the firm has a constant dividend payout ratio of 20 percent, and desires a sustainable growth rate of 20 percent, it must have a return on equity equal to what?

4. Under the dividend-discount model, what is the value of a share of stock that is expected to pay a $7.50 end-of-year dividend and have an ex-dividend price of $55 if the risk-adjusted discount rate is 7.5%?

Solution Preview

1. A stock had a price at the beginning of the year of $100 and was selling for $102 at the end of the year. If the total shareholder returns were 5 percent, then the cash dividend per share must have been what?

Final Price = $102
Initial Price = $100
Cash Dividend = D = ?
Total Return = Capital gain + Dividend yield
5% = [(102-100)/100] + D/100
3% = D/100
D = $3

2. A firm with a 50 percent debt ratio faces a ...

Solution Summary

There are four problems related to dividend and stock valuation concepts. Solution to first problem depicts the methodology to find the dividend paid in the given scenario. Solution to second problem describes the step by step procedure to calculate the return on equity. Solution to third problem calculates the sustainable growth rate in the given case. Solution to fourth problem calculates the current value of stock.

$2.19