Juggernaut Satellite Corporation earned $18 million for the fiscal year ending y
ID: 2651662 • Letter: J
Question
Juggernaut Satellite Corporation earned $18 million for the fiscal year ending yesterday. The firm also paid out 30 percent of its earnings as dividends yesterday. The firm will continue to pay out 30 percent of its earnings as annual, end-of-year dividends. The remaining 70 percent of earnings is retained by the company for use in projects. The company has 2 million shares of common stock outstanding. The current stock price is $93. The historical return on equity (ROE) of 13 percent is expected to continue in the future.
What is the required rate of return on the stock?
Explanation / Answer
Answer:
Calculation of required rate of return on the stock:
Required rate (Ke) = (D1 /P0) +g
G= Growth rate = ROE * Retention ratio = 13%*70% = 9.1% =0.091
D1 = Expected Dividend Per share = Current dividend * (1+g)
= (18000000*30%/2000000) * (1+0.091)
= 2.7*1.091
=$2.9457
P0 = Current Price of the stock =$93
Hence ,
Required rate of return = (2.9457 / 93) + 0.091
= 0.1227
=12.27%
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