Two questions here! 1. NoGrowth Corportation currently pays a dividend of $0.50

Question

Two questions here!

1. NoGrowth Corportation currently pays a dividend of $0.50 per quarter, and it will continue to pay this dividend forever. What is the price per share of NoGrowth stock if the firms equity cost of capital is 15%?

2. Laurel Enterprises expects earnings next year of $4 per share and has a 40% retention rate, which it plans to keep constant. It's equity cost of capital is 10%, which is also its expected return on new investment. Its earnings are expected to grow forever at a rate of 4% per year. If its next dividend is due in one year, what do you estimate the firm's current stock price to be?

Explanation / Answer

Hi,

Please find the answers as follows:

Part 1:

Dividend Per Quarter = .50

Dividend for the Complete Year = 4*.50 = 2

P = 2/.15 = 13.33

Answer is 13.33

Part 2:

PO = D1/(Ke - g)

PO = 4*(1-.40)/(10 - .04) = 40

Answer is 40.

Thanks.

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