GottaGrow Corporation has expected earnings per share of $10. It has a history of paying cash dividends equal to 25% of earnings. The market capitalization rate for GottaGrow stock is 10% per year, and the expected rate of return on future investments is 10% per year. Using the constant growth rate discounted dividend model, what is the expected growth rate of dividends? What is the model’s estimate of the present value of the stock? What is the expected price of a share a year from now?

GottaGrow Corporation has expected earnings per share of $10. It has a history of paying cash dividends equal to 25% of earnings. The market capitalization rate for GottaGrow stock is 10% per year, and the expected rate of return on future investments is 10% per year. Using the constant growth rate discounted dividend model, what is the expected growth rate of dividends? What is the model’s estimate of the present value of the stock? What is the expected price of a share a year from now?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 23P

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Question

GottaGrow Corporation has expected earnings per share of $10. It has a history of paying cash
dividends equal to 25% of earnings. The market capitalization rate for GottaGrow stock is 10% per
year, and the expected rate of return on future investments is 10% per year. Using the constant growth
rate discounted dividend model, what is the expected growth rate of dividends? What is the model’s
estimate of the present value of the stock? What is the expected price of a share a year from now?

Definition Definition Percentage gain or loss from a specific investment over time. The rate of return is the difference between the closing and initial values of an investment divided by the initial value of the investment. The closing value includes any intermediate cash flows such as dividends or interest amounts.

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