Question

Shackleford corporation net income this year is $800,000. The company generally retains 35% of net income for reinvestment. the company's common equity currently has a book value of 5,000,000. they just paid a dividend of $1.37, and the required rate of return on this stock is 12%. compute tha value fo this stock if dividends are expected to continue growing indefinitley at the comoanys interal growth rate

A. $22.61

B.$15.63

C. $11.42

D. $4.35

Answer 1

A. $22.61

Step-by-step explanation:

First,

find the growth rate(g);

g = ROE *retention rate

retention rate = 35%

ROE = Net income/value of equity

ROE = 800,000/5,000,000 = 0.16

Therefore, g = 0.16*0.35

g =0.056 or 5.6%

Price =
`(D0(1+g))/((r-g))`

D0 = Recently paid dividend

g = growth rate

r = required return

Price =
`(1.37(1.056))/(0.12-0.056) \\ \\ =(1.44672)/(0.064) \\ \\ =22.605`

Therefore, the value of this stock is $22.61