1. You are considering buying shares of stock in the Steel Mill. The forecast fo
ID: 2717737 • Letter: 1
Question
1. You are considering buying shares of stock in the Steel Mill. The forecast for the firm is steady growth over the next decade. The firm just paid its annual dividend of $1.42 per share and has plans to increase that amount by 4 percent annually indefinitely. You require a 12.5 percent return on this type of security. What is your estimate of the value of this stock ten years from now?
A. $24.13
B. $24.38
C. $24.73
D. $25.06
E. $25.72
2. An increase in the retention ratio will:
A. increase the dividends per share.
B. decrease a firm's sustainable rate of growth.
C. decrease the equity of a firm.
D. increase the dividend growth rate.
E. increase the value of a firm's stock.
Explanation / Answer
Value of this stock ten years from now = D11/(Re-g)
Value of this stock ten years from now = 1.42*1.04^11/(12.5%-4%)
Value of this stock ten years from now = $ 25.72
Answer
E. $25.72
2. An increase in the retention ratio will:
D. increase the dividend growth rate.
Note : Growth rate = ROE * retention ration
If ROE or retention ratio increase than automatically growth rate increases
An increase in the retention ratio will decrease the dividends per share , increase a firm's sustainable rate of growth
equity of a firm is not effected from increase in retention ratio
value of a firm's stock increase or decrease depend on Dividend per share , Cost of equity & growth rate , so here both componenet need to be verified,
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