Question

Sanders, Inc., paid a $4 dividend per share last year and is expected to continue to pay out 60% of its earnings as dividends for the foreseeable future. If the firm is expected to generate a 14% return on equity in the future, and if you require a 16% return on the stock, the value of the stock is _________.

Answer 1

Answer: $40.62

Explanation:

The following can be deduced based on the information given:

D0=4, Ks = 16%

g = (1-Div Payout ratio) × ROE

= (1-60%) × 14%

= (1 - 0.6) × 14%

= 0.4 × 14%

= 5.60%

Then, the price of stock will be calculated as:

=Do × (1+g)/(Ks-g)

= 4 × (1+5.60%)/(16%-5.60%)

= 4 × (1.056)/(10.4%)

= 4 × (1.056/0.104)

= 4 × 10.153846

= $40.62