Question

Sanders, Inc., paid a $4 dividend per share last year and is expected to continue to pay out 60% of its earnings as dividends for the foreseeable future. If the firm is expected to generate a 13% return on equity in the future, and if you require a 15% return on the stock, the value of the stock is _________.

Answer 1

The correct solution is "$42.94".

Step-by-step explanation:

The given values are:

D0 = 4

Ks = 15%

As we know,

⇒
`g = (1-Div \ payout \ ratio)* ROE`

`=(1-60 \ percent)* 13 \ percent`

`=5.20 \ percent`

By using the Gordon Model, we get

⇒
`P0=Do* ((1+g))/((Ks-g))`

`=4* ( (1+5.20 \ percent))/((15 \ percent-5.20 \ percent))`

`=42.94` ($)