FUNDAMENTALS OF FINANCE(LL)
FUNDAMENTALS OF FINANCE(LL)
9th Edition
ISBN: 9781260477184
Author: BREALEY
Publisher: MCGRAW-HILL CUSTOM PUBLISHING
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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"Dividend paying stocks cannot be growth stocks" Do you agree or disagree? Discuss choosing two stocks to help justify your view.
"Dividend paying stocks cannot be growth stocks" Do you agree or disagree? Discuss choosing two stocks to help justify your view.
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