Sanders, Inc., paid a $4 dividend per share last year and is expected to continu

Question

Sanders, Inc., paid a $4 dividend per share last year and is expected to continue to pay out 60% of its earnings as dividends for the foreseeable future. If the firm is expected to generate a 15% return on equity in the future, and if you require a 17% return on the stock, the value of the stock is _________.

Sanders, Inc., paid a $4 dividend per share last year and is expected to continue to pay out 60% of its earnings as dividends for the foreseeable future. If the firm is expected to generate a 15% return on equity in the future, and if you require a 17% return on the stock, the value of the stock is _________.

Explanation / Answer

Answer:

g = (1-.60) * 15% = 6%

D1 = 4 * (1.06) = 4.24

Stock value = D1 / (r-g)

= 4.24 / (.17 - 0.06)

= $38.55

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