roblem 7-21 Constant-Growth Model (LO2) ere are data on two stocks, both of which have discount rates of 15% Return on equity Earnings per share. Dividends per share Stock A 15% Dividend payout ratios $2.50 $ 1.50 Stock B $ 1.80 $ 1.50 a. What is the dividend payout ratio for each firm? Note: Enter your answers as a percent rounded to 2 decimal places. 12% Stock A 60 00 % Stock B 83 3295
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
![**Problem 7-21 Constant-Growth Model (LO2)**
Here are data on two stocks, both of which have discount rates of 15%.
| | Stock A | Stock B |
|------------------|---------|---------|
| Return on equity | 15% | 12% |
| Earnings per share | $2.50 | $1.80 |
| Dividends per share | $1.50 | $1.50 |
**a. What is the dividend payout ratio for each firm?**
*Note: Enter your answers as a percent rounded to 2 decimal places.*
| | Stock A | Stock B |
|-------------------------|---------|----------|
| Dividend payout ratios | 60.00% | 83.33% |
**b. What is the expected dividend growth rate for each stock?**
*Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.*
| | Stock A | Stock B |
|------------------------------|---------|----------|
| Expected dividend growth rates | 6.00% | 2.00% |
**c. What is the value of each stock?**
*Note: Do not round intermediate calculations. Round your answers to 2 decimal places.*
| | Stock A | Stock B |
|-----------|---------|---------|
| Stock Price | | |
*[Values for stock prices are not provided in the image]*](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F2b2f6d1e-6332-46ff-aac3-69fac171d186%2F7b0a71ef-b84d-43fa-9966-8ba1aabfca32%2Faa3g7y_processed.jpeg&w=3840&q=75)
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