Question

sparrow products industries stock is currently selling for $57. it just paid its annual dividend of $4 after reporting an roe of 15%. the firm pays out 50% of its earnings as dividends. what is the expected return of this stock?

Answer 1

Okay, let's solve this step-by-step:

* Stock price = $57

* Dividend = $4

* ROE (Return on Equity) = 15%

* Payout ratio = 50% (The company pays out 50% of earnings as dividends)

Now to calculate the expected return of the stock:

1) First find the earnings per share (EPS):

Since the dividend is $4 and the payout ratio is 50%, we know that:

Dividend / Payout ratio = EPS

$4 / 50% = $8 EPS

2) Now we can find the dividend growth rate:

Dividend growth rate = ROE * (1 - Payout ratio)

= 15% * (1 - 50%)

= 15% * 0.5

= 7.5%

3) Expected return = Dividend yield + Dividend growth rate

Dividend yield = Dividend / Stock price

= $4 / $57

= 7%

So expected return = 7% + 7.5% = 14.5%

In summary, the expected return of this stock is 14.5%.