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Valuing stocks

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19. Constant-Growth Model. Here are data on two stocks, both of which have discount rates of
15 percent:
www.mhhe.com/bmm4e
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

The solution explains the use of constant growth model to calculate the stock price.

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a. The dividend payout ratio is dividends per share/earnings per share
Stock A - Dividend payout ratio = 1/2 = 50%
Stock B - Dividend payout ratio = 1/1.50=66.67%

b. The ...

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