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Constant Growth Model: Dividend Payout Ratios and Stock Price

Constant-Growth Model. Here are data on two stocks, both of which have discount rates of 15 percent:

Return on equity Stock A Stock B
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?

Solution Preview

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

Pay out ratio = Dividend per share /Earning per share

Stock A = 1/2=.5 or 50%
Stock B = 1/1.5= .67 or 67%

b. What are the ...

Solution Summary

In about 125 words, this solution explains the calculations related to dividend payout ratios and stock prices. All calculations are demonstrated with the accompanying variables highlighted.

$2.19