Please solve the highlighted since it is incorrect. Joseph V Chapter_7 KCSecure

Question

Please solve the highlighted since it is incorrect.

Joseph V Chapter_7 KCSecure https://newconnect.mheducation.com/flow/connect.html R Apps G Google KindleeBay Hi Services Podcasts Books Baruch2 Chapter 7 G Help Save & Exlt Submlt Saved Check my work Problem 7-21 Constant-Growth Model (LO2) 10 Here are data on two stocks, both of which have discount rates of 15%; points Stock A Stock B Return on equity Earnings per share Dividends per share 15% 10% $2.00 $1.50 $1.00 $1.00 Book a. What are the dividend payout ratios for each firm? (Enter your answers as a percent rounded to 2 declmal places.) Hint Stock A Stock B Print Dividend payout ratios 50.001% 66.671% References b. What are the expected dividend growth rates for each firm? (Do not round Intermedlate calculations. Enter your answers as a percent rounded to 2 declmal places.) Stock A Stock B Expected dividend growth rates 50 001 % 33.331 % c. What is the proper stock price for each firm? (Do not round Intermediate calculations. Round your answers to 2 declmal places.) Stock A Stock B Stock price 13.33? $ 8.57 Type here to search 19

Explanation / Answer

Calculations

Expected growth rate =Return on investment*Retention ratio

where Retention ratio=(1-dividend payout %)

Accordingly,

(b) Stock A Stock B

15*50%=7.5% 15*33.33%=4.99 or 5%(approx)

(c) Value of shares = Do*(1+g)/ke-g

Stock A Stock B

1*(1+0.075)/(15-7.5)% 1*(1+0.05)/(15-5)%

= $14.33 =$10.50

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