Explore BrainMass

Explore BrainMass

    Solve: Stock Prices

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Pigeon Express currently plows back 40 percent of its earnings and earns a return of 20 percent on this investment. The dividend yield on the stock is 4 percent.

    1. Assuming that Pigeon can continue to plow back this proportion of earnings and earn a 20 percent return on the investment, how rapidly will earnings and dividends grow? What is the expected return on Pigeon stock?

    2. Suppose that management suddenly announces that future investment opportunities have dried up. Now Pigeon intends to pay out all its earnings. How will the stock price change?

    3.. Suppose that management simply announces that the expected return on new investment will in the future be the same as the market capitalization rate. Now what is Pigeon stock price?

    © BrainMass Inc. brainmass.com June 3, 2020, 7:06 pm ad1c9bdddf
    https://brainmass.com/business/finance/solve-stock-prices-86042

    Solution Preview

    Please see the attached file.

    Pigeon Express currently plows back 40 percent of its earnings and earns a return of 20 percent on this investment. The dividend yield on the stock is 4 percent.

        1.. Assuming that Pigeon can continue to plow back this proportion of earnings and earn a 20 percent return on the investment, how rapidly will earnings and dividends grow? What is the expected return on Pigeon stock?

    Plowback rate= 40%
    Return on invetsment= 20%
    growth rate of dividends= g = plowback rate x return on investment = 8.00% =40.% x 20.%

    Current Dividend = Do
    Current price= Po
    It is given that Do/Po = 4% (The dividend yield on the stock is 4 percent.)
    or Po = Do/4%

    Using the dividend discount model;
    Po= Div1/ (r-g)
    where r = cost of ...

    Solution Summary

    This solution helps solve questions about stock prices.

    $2.19

    ADVERTISEMENT