Answered: Suppose Grant is currently distributing… | bartleby

FINANCIAL ACCOUNTING

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Estimating growth rates
It is often difficult to estimate the expected future dividend growth rate for use in estimating the cost of existing equity using the DCF or DG approach.
In general, there are three available methods to generate such an estimate:
• Carry forward a historical realized growth rate, and apply it to the future.
• Locate and apply an expected future growth rate prepared and published by security analysts.
• Use the retention growth model.
Suppose Grant is currently distributing 40% of its earnings in the form of cash dividends. It has also historically generated an average return on equity
(ROE) of 22%. Grant's estimated growth rate is
%.

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Caccamise Co. is expected to maintain a constant 6.5% growth rate in its dividends, indefinitely. If the company has a dividend yield of 7.5% what is the required return on the company’s stock?
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QuickRunners Co. is currently selling for $50.00 per share. The company expects to pay a dividend of $3.50 per share in a year. For the remainder of the company’s life, dividends are expected to grow at a constant rate, and investors are expected to require a 9% return to invest in QuickRunners Co. stock. What is the dividend growth rate using the constant growth model
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