a. Assuming the current market price of the stock reflects its intrinsic value as computed using the constant-growth DDM, what rate o return do Nogro's investors require? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Rate of return % b. By how much does its value exceed what it would be if all earnings were paid as dividends and nothing were reinvested? (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places.
a. Assuming the current market price of the stock reflects its intrinsic value as computed using the constant-growth DDM, what rate o return do Nogro's investors require? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Rate of return % b. By how much does its value exceed what it would be if all earnings were paid as dividends and nothing were reinvested? (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places.
Fundamentals of Financial Management (MindTap Course List)
14th Edition
ISBN:9781285867977
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Eugene F. Brigham, Joel F. Houston
Chapter15: Distributions To Shareholders:dividends And Share Repurchases
Section: Chapter Questions
Problem 8P: ALTERNATIVE DIVIDEND POLICIES Rubenstein Bros. Clothing is expecting to pay an annual dividend per...
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:Problem 18-12
The stock of Nogro Corporation is currently selling for $30 per share. Earnings per share in the coming year are expected to be $4.00.
The company has a policy of paying out 50% of its earnings each year in dividends. The rest is retained and invested in projects that
earn a 16% rate of return per year. This situation is expected to continue indefinitely.
a. Assuming the current market price of the stock reflects its intrinsic value as computed using the constant-growth DDM, what rate of
return do Nogro's investors require? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Rate of return
%
b. By how much does its value exceed what it would be if all earnings were paid as dividends and nothing were reinvested? (Do not
round intermediate calculations. Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places.)
PVGO
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