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Description of Constant-Growth Model

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Data on two stocks, both have discount rates of 15%

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 Summary

A description of constant-growth models is given to find the payout ratio for each firm.

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a. What are the dividend payout ratios for each firm?
dividend payout ratio is d = dividend / EPS
Then
dA = 1/2 = ...

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