1)BOss Industries have committed to providing its share holders with a 12% retur

Question

1)BOss Industries have committed to providing its share holders with a 12% return on equity forever. They just began paying annual dividends. They've committted to paying 10% of their net income as dividends for the next 2 years and then they will pay 70% of their net income as dividends after that forever. Calculate the estimatedg rowth rate for the company in the first two years and after that?

2) BOss Industries just paid a dividend of $0.50 and the market discount rate is 9%. What is the market price of a share of BOss Industries now?

Explanation / Answer

1)

estimated g rowth rate for the company in the first two = ROE*(1-dividend payout)=12%*(1-0.10)=10.8%

estimated g rowth rate for the company after two years == ROE*(1-dividend payout)=12%*(1-0.70)=3.6%

2)

price = (0.50*1.108^1)/1.09^1+(0.50*1.108^2)/1.09^2+((0.50*1.108^2*1.036)/(0.09-0.036))/1.09^2=10.937

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