Question

Kinard's Kennels Inc. ROE is 20%. Their dividend payout ratio is 70%. The last dividend, just paid, was $2.00. If dividends are expected to grow by the company's internal growth rate indefinitely, what is the current value of Kinard's common stock if its required return is 18%? Select one: a. $11.52 b. $16.89 c. $17.67 d. $14.92

Answer 1

option C

Explanation:

given,

ROE = 20 %

dividend payout ratio = 70%

paid = $ 2.00

value of current stock if required return is 18% = ?

g = (1 - payout ) x ROE

= (1 - 0.7 ) x 20%

= 6 %

dividend = 2 (1 + growth rate)

= 2 x (1 + 0.06) =$ 2.12

as current value of stock

=
`(D1)/(required\ return - growth \ rate)`

=
`(2.12)/(0.18 - 0.06)`

= $17.67

hence, the correct answer is option C