The stock of Nogro Corporation is currently selling for $28 per share. Earnings per share in the coming year are expected to be $7.00. 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 25% rate of return per year. This situation is expected to continue indefinitely. Required: 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? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. By how much does its value exceed what it would be if all earnings were paid as dividends and nothing were reinvested? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. c. If Nogro were to cut its dividend payout ratio to 25%, what would happen to its stock price? Note: Round your answer to 2 decimal places. d. What would happen to its stock price if Nogro eliminated the dividend? Note: Round your answer to 2 decimal places. X Answer is complete but not entirely correct. a. Rate of return b. PVGO c. Stock price d. Stock price $ $ $ 25.00 0.00 0.00 X 0.00 %
The stock of Nogro Corporation is currently selling for $28 per share. Earnings per share in the coming year are expected to be $7.00. 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 25% rate of return per year. This situation is expected to continue indefinitely. Required: 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? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. By how much does its value exceed what it would be if all earnings were paid as dividends and nothing were reinvested? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. c. If Nogro were to cut its dividend payout ratio to 25%, what would happen to its stock price? Note: Round your answer to 2 decimal places. d. What would happen to its stock price if Nogro eliminated the dividend? Note: Round your answer to 2 decimal places. X Answer is complete but not entirely correct. a. Rate of return b. PVGO c. Stock price d. Stock price $ $ $ 25.00 0.00 0.00 X 0.00 %
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Answer C and D correctly!
Transcribed Image Text:The stock of Nogro Corporation is currently selling for $28 per share. Earnings per share in the coming year are expected to be $7.00.
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 25% rate of return per year. This situation is expected to continue indefinitely.
Required:
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?
Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
b. By how much does its value exceed what it would be if all earnings were paid as dividends and nothing were reinvested?
Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
c. If Nogro were to cut its dividend payout ratio to 25%, what would happen to its stock price?
Note: Round your answer to 2 decimal places.
d. What would happen to its stock price if Nogro eliminated the dividend?
Note: Round your answer to 2 decimal places.
X Answer is complete but not entirely correct.
a. Rate of return
b. PVGO
c. Stock price
d. Stock price
$
$
$
25.00
0.00
0.00 X
0.00
%
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