39. (6 points) W Inc. currently has EPS of $10.00 and a payout ratio of 25%. Ana

Question

39. (6 points) W Inc. currently has EPS of $10.00 and a payout ratio of 25%. Analysts predict that the dividend should grow 8% per year for the foreseeable future. The 90 day T Bill rate is 2%. The S&P 500 is expected to return 12% over the next year. ABC has a Beta of 1.3. a. What is the current dividend per share for W? b. Using the CAPM, what is the required return for W? c. Using the above information and the Dividend Growth Model, what is the expected current price of W to the nearest dollar?

Explanation / Answer

(a) Dividend per share = EPS x Payout ratio = $10 x 25% = $2.5

(b) Required return, Ke = Risk-free (T-bill) Rate + Beta x (S&P Return - Risk-free rate)

= 2% + 1.3 x (12 - 2)% = 2% + 1.3 x 10% = 2% + 13% = 15%

(c) Expected price = [Current Dividend per share x (1 + g)] / (Ke - g) where g: Dividend growth rate

= [$2.5 x 1.08] / (0.15 - 0.08) = $2.7 / 0.07 = $39

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