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Stock price using - Constant Growth Model

Constant-Growth Model. Here are data on two stocks, both of which 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?

Solution Preview

Constant-Growth Model. Here are data on two stocks, both of which 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?

Stock A
Payout Ratio = Dividend paid/Earnings per share
= ...

Solution Summary

This solution is comprised of a detailed calculation to answer the dividend payout ratios, expected dividend growth rates, and stock price.

$2.19