1. The next dividend payment by ECY, Inc, will be S3.20 per share. The dividends
ID: 2782357 • Letter: 1
Question
1. The next dividend payment by ECY, Inc, will be S3.20 per share. The dividends are anticipated to maintain a growth rate of 6 percent, forever. If ECY stock currently sells for 63.50 pcr share, what is the required return? (Please show your works and calculate.) 2. The newspaper reported last week that Bennington Enterprises earned S34 million this year The report also stated that the firm's return on equity is 16 percent. Bennington retains 80 percent of its carnings. What is the firm s carnings growth rate? What will next year's carnings be? (You should start with stating appropriate assumptions. Also, please show your works and calculate.) For What is the expected capital gains yield? is company, what is the dividend yield?Explanation / Answer
According to dividend-discount model,
P0 = D1/(R-G)
P0 = Current stock price
D1 - Dividend at t =1
R - Required rate
G - Growth rate
63.5 = 3.2/(R-0.06)
R = 0.1104 = 11.04%
- Dividend yield = DIvidend/price = 3.2/63.5 = 0.0504 = 5.04%
- Expected capita gains yield = Required return - dividend yield = 11.04 - 5.04 = 0.06%
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