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Stock price using Constant-Growth Model

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Here are data on two stocks, both of which have discount rates of 15 percent:
Stock A Stock B
Return on equity 15% 10%
Earnings per share $2.00 $1.50
Dividends per share $1.00 $1.00
a. What are the dividend payout ratios for each firm?
b. What are the expected dividend growth rates for each firm?
c. What is the proper stock price for each firm?

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Stock price is calculated using Constant-Growth Model

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a. What are the dividend payout ratios for each firm?

Dividend payout ratio= Dividend per share/ Earnings per share

Stock A: 1/2 =1/2

Stock B: 2/3 =1/1.5

b. What are the expected dividend growth rates for each firm?

Expected dividend growth= plowback ratio x Return on equity = (1-Payout ratio) x Return on equity

Stock ...

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