Question

You anticipate that Canuck Industries will make total payouts of ​$4.675 billion at the end of this year. Assume that all payouts occur annually at the end of the year and that we are at the beginning of the year. Analysts forecast that​ Canucks payouts will grow at a constant rate in perpetuity. Your company requires a return of 12​% on all new investments. Canuck has 1.4609 billion shares outstanding and its shares are currently trading for ​$40.00. What growth rate have you assumed in estimating Canuck Industries upcoming payouts? (round to the nearest whole percent. No percentage sign needed)

Answer 1

The assumed growth rate in estimating Canuck Industries' upcoming payouts is 5%.

Step-by-step explanation:

To determine the growth rate, we can use the Gordon Growth Model (Dividend Discount Model), which is expressed as the required return minus the dividend growth rate. In this scenario, the total payouts of $4.675 billion represent dividends, and the required return is 12%.

The formula can be rearranged to solve for the growth rate: Growth Rate = Required Return - Dividend Payout Rate. Plugging in the values, Growth Rate = 12% - 7%, resulting in a growth rate of 5%.

This indicates that analysts and investors are anticipating Canuck Industries' payouts to increase by 5% annually. The growth rate assumption is crucial for estimating the intrinsic value of the stock and making informed investment decisions.