Question

FLASH Delivery has EPS of $6.00 per share and has a payout ratio of 40%. Its dividend is expected to grow at a rate of 5.25%. If FLASH stock is trading at $22.86, then the shareholder's required return is closest to:_______

a. 14.2%
b. 15.7%
c. 16.3%
d. 16.9%

Answer 1

The answer is "Option c"

Step-by-step explanation:

The Dividend payout ratio is 40% so that EPS* is the dividend payout ratio of the company:

`= 6 * 40 \% \\\\= \$ \ 2.40`

Inventory market value:

`= Dividend * ((1+g))/((r-g))`

Where r = return rate is needed

g= growth
`= 5.25\% = (5.25)/(100) = 0.0525`

`\to 22.86 = ((2.4 * (1+g)))/( r-0.0525)\\\\\to 22.86 = ((2.4 * (1+0.0525)))/(r-0.0525)\\\\\to (22.86 * r)-(22.86 * 0.0525)=2.526\\\\\to (22.86 * r)-1.20015=2.526\\\\\to 22.86r=3.72615\\\\\to r=0.1630\\\\\to r=16.30 \%`