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Stock Value Based on Equity, Payout Ratio and Risk Free Rate

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DK Corp. pays no dividends for 2 years. At the end of third year it pays a $2.00 dividend and then establishes a constant dividend growth rate. What should be the appropriate value of the company's common stock based on the following information?
o Return on Equity of the company at the 3rd year = 0.12 or 12%
o Payout ratio of the company at the 3rd year = 0.4 or 40%
o Risk free rate = 4%, beta of the company = 1.3, market return = 10%

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This solution provides the steps for determining the appropriate value of a companies common stock based on the equity, payout ratio and the risk free rate.

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The value of stock would be the present value of all dividends. We are given D3 and then the dividends grow at a constant rate. We use the ...

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