Company stock sells for 200 pesos per share and next year's dividend is 8.5 pesos. Security analysts are forecasting earnings growth of 7.5% per year for the next 5 years.
a. Assume that earnings and dividends are expected to grow at 7.5% in perpetuity. What rate of return are investors expecting?
b. The company has generally earned about 12% on book equity (roe = .12) and paid out 50% of earnings as dividends. Suppose it maintains the same roe and payout ratio in the long-run future. What is the implication for g? For r? Should you revise your answer to part (a) of this question?© BrainMass Inc. brainmass.com June 3, 2020, 9:37 pm ad1c9bdddf
a. Price = Next year Div/(r-g)
Here Price = 200
Next year Div = 8.5
g = .075
Thus putting these values in the above formula we ...
The solution explains how to calculate rate of return and impact growth rate can have on stock prices.