Question

Juggernaut Satellite Corporation earned $18 million for the fiscal year ending yesterday. The firm also paid out 30 percent of its earnings as dividends yesterday. The firm will continue to pay out 30 percent of its earnings as annual, end-of-year dividends. The remaining 70 percent of earnings is retained by the company for use in projects. The company has 2 million shares of common stock outstanding. The current stock price is $93. The historical return on equity (ROE) of 13 percent is expected to continue in the future.

What is the required rate of return on the stock?

Answer 1

6.9%

Step-by-step explanation:

dividend paid= 0.3×$18000000=5400000 thirty percent of earnings

Dividend per share=5400000/2000000=$2.7 there are 2million shares outstanding.

Earnings per share=$18000000/2000000=$9

Growth rate =ROE×(1-Retention Ratio)

=0.13×(1-0.7)

=0.039

From the Information given using we will used the dividend discount model

P=D1/r-g

93=2.7(1.039)/r-0.039 cross multiply

93r-3.627=2.8053

93r =6.4323

r=6.4323/93

r =0.069/6.9%

Answer 2

The required rate of return on the stock is 12.26%

Step-by-step explanation:

Required rate of return = r= D1/P0+ g

First we need to find out the divident paid in one year (D1) and the dividend growth rate (g).

Dividend per share = (Net income × Payout ratio) / No. of Shares outstanding

= ( 18,000,000 * 0.30) / 2,000,000

Dividend per share= $2.7.

Now we will find out the divident growth rate,

g= ROE * b

g = 0.13 * 0.70

growth rate = 9.1%.

Now we have all the data to find out the required rate of return by r= D1/P0+ g,

r = 2.7(1+0.091) / 93 + 0.091

r = 0.1226 or 12.26%

---> we used D1= 2.7(1+0.091) because we have to find the value of dividend paid in one year.