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Constant Growth Model

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19. Constant-Growth Model.
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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This solution is comprised of a detailed explanation to answer what are the dividend payout ratios for each firm, what are the expected dividend growth rates for each firm, and what is the proper stock price for each firm.

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

Stock A
Payout Ratio = Dividend paid/Earnings per share
= 1.00/2.00
= 0.50

Stock B
Payout Ratio = Dividend paid/Earnings per share
= 1.00/1.50
= 0.67

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

Stock ...

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