Question

Royal Hills Corporation pays 30% of its earnings to stockholders and retains 70% to finance growth. The firm recently paid a $3.20 common stock dividend. Investors require a return of 14% on Royal Hills common stock. If the firm earns a return on equity of 10%, what should be the value of Royal Hills common stock?

Answer 1

Answer:

$48.91        

Explanation:

The computation of the value of the common stock is shown below:

As we know that

Growth rate = Return on equity × retention ratio

= 10% × 0.7

= 7%

So,

The Value of the common stock = Dividend next year ÷ (Required return - growth rate)

= $3.2 × 1.07 ÷ (0.14-0.07)

= $48.91        

Basically we applied the above formula so that the value of the common stock could come