1. Herrera Motor Inc. paid a $3.25 dividend last year. At a constant growth rate
ID: 2804578 • Letter: 1
Question
1. Herrera Motor Inc. paid a $3.25 dividend last year. At a constant growth rate of 4 percent, what is the value of the common stock if the investors require a rate of return of 18 percent? The value of the Herrera Motor common stock is $_______ (Round to the nearest cent.)2.Given that a firm's return on equity is 21 percent and management plans to retain 37 percent of earnings for investment purposes, what will be the firm's growth rate? The firm's growth rate will be _________ (Round to two decimal places.) 1. Herrera Motor Inc. paid a $3.25 dividend last year. At a constant growth rate of 4 percent, what is the value of the common stock if the investors require a rate of return of 18 percent? The value of the Herrera Motor common stock is $_______ (Round to the nearest cent.)
2.Given that a firm's return on equity is 21 percent and management plans to retain 37 percent of earnings for investment purposes, what will be the firm's growth rate? The firm's growth rate will be _________ (Round to two decimal places.) 1. Herrera Motor Inc. paid a $3.25 dividend last year. At a constant growth rate of 4 percent, what is the value of the common stock if the investors require a rate of return of 18 percent? The value of the Herrera Motor common stock is $_______ (Round to the nearest cent.)
2.Given that a firm's return on equity is 21 percent and management plans to retain 37 percent of earnings for investment purposes, what will be the firm's growth rate? The firm's growth rate will be _________ (Round to two decimal places.)
Explanation / Answer
1.Price of stock
=3.38
2.
Growth Rate= IRR(or return on equity) * Retention ratio of company
=21%*0.37
=7.77%
1.Price of stock
=D1/r-g =3.38/0.18-.04 =3.38/.14 =24.14286 =24.14 =24(rounded up to nearest cent) Future dividend = Dividend x (1 + (growth rate / 100)) D1 =D0(1+g) =3.25(1+.04) =3.25(1.04) =3.25*1.04=3.38
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