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. i.e 2)

Answer 1

To estimate the growth rate assumed for Canuck Industries' upcoming payouts, we can use the Gordon Growth Model. Plugging in the given values, we find that the growth rate is approximately -4%.

Step-by-step explanation:

To estimate the growth rate assumed for Canuck Industries' upcoming payouts, we can use the Gordon Growth Model (also known as the Dividend Discount Model). This model assumes that the stock's price is equal to the present value of all future dividends. The formula for the Gordon Growth Model is P = D / (r - g), where P is the price per share, D is the dividend per share, r is the required return, and g is the growth rate.

In this case, we have the following information:

• Total projected payouts: $4.675 billion
• Number of shares outstanding: 1.4609 billion
• Current stock price: $40.00
• Required return: 12%

We can rearrange the formula to solve for the growth rate:

g = (D / P) - r

Using the given information, the dividend per share (D) would be $4.675 billion / 1.4609 billion = $3.19 per share. The stock price (P) is $40.00, and the required return (r) is 12%. Plugging these values into the formula:

g = ($3.19 / $40.00) - 0.12 = 0.07975 - 0.12 = -0.04025

Rounding to the nearest whole percent, we have a negative growth rate of approximately -4%.