Dividend payout ratio 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:
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 explains the Dividend payout ratio and stock price
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Dividend payout ratio= DPS/EPS=
Stock A= 1/2=50%
Stock B= 1/1.5= 66.7%
Expected dividend growth rate=
Retention rato* return on equity
Retention ...
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