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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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    Solution Preview

    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 ...

    Solution Summary

    Stock price is calculated using Constant-Growth Model

    $2.19

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