Constant Growth Model: Dividend Payout Ratios and Stock Price
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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?
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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.
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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 ...
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