FUNDAMENTALS OF CORP.FIN.(LL)-W/CONNECT
FUNDAMENTALS OF CORP.FIN.(LL)-W/CONNECT
10th Edition
ISBN: 9781260848670
Author: BREALEY
Publisher: MCG
Question
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Chapter 7, Problem 21QP

a.

Summary Introduction

To determine: The dividend payout ratio for Stock A and Stock B.

a.

Expert Solution
Check Mark

Answer to Problem 21QP

The dividend payout ratio for Stock A is 0.50 and Stock Bis 0.67.

Explanation of Solution

Determine the dividend payout ratio for Stock A and Stock B

DividendPayoutStockA=[Dividendspershare(D0)Earningspershare(EPS)]=[$1$2]=0.50DividendPayoutStockB=[Dividendspershare(D0)Earningspershare(EPS)]=[$1$1.50]=0.666667or0.67

Therefore, the dividend payout ratio for Stock A is 0.50 and Stock B is 0.67.

b.

Summary Introduction

To determine: The expected dividend growthrate for Stock A and Stock B.

b.

Expert Solution
Check Mark

Answer to Problem 21QP

The expected dividend growth rate for Stock A is 7.50% and Stock B is 3.33%.

Explanation of Solution

Determine the expected dividend growth rateforStock A and Stock B

DividendGrowthRateStockA=[PlowbackRatio×ReturnonEquity(ROE)]=[(10.50)×15%]=0.075or7.50%DividendGrowthRateStockB=[PlowbackRatio×ReturnonEquity(ROE)]=[(10.6667)×10%]=0.033333or3.33%

Therefore, the expected dividend growth rate for Stock A is 7.50% and Stock B is 3.33%.

c.

Summary Introduction

To determine: The stock value for Stock A and Stock B.

c.

Expert Solution
Check Mark

Answer to Problem 21QP

The stock value for Stock A is $13.33 and Stock B is $8.57.

Explanation of Solution

Determine the stock value forStock A and Stock B

StockPrice(P0)StockA=[CurrentDividends(D0)RequiredReturn(r)GrowthRate(g)]=[$115%7.50%]=$13.33StockPrice(P0)StockB=[CurrentDividends(D0)RequiredReturn(r)GrowthRate(g)]=[$115%3.3333%]=$8.571429or$8.57

Therefore, the stock value for Stock A is $13.33 and Stock B is $8.57.

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