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Stock Valuation

You are considering buying the stock of two very similar companies. Both companies are expected to earn $3 per share this year. However, Company D is expected to pay all of its earnings out as dividends, while Company G is expected to pay out only one-third of its earnings, or $1. D's stock price is $20. . Both companies are equally risky. What is the best estimate of Company G's growth rate?

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The total expected return for D is Kd = D/Po + g = 15% + 0% = 15%. The total expected return for G will ...

Solution Summary

Comparison of stocks from similar companies but with different earnings payouts.