Comapny X has net income of 1,000,000 and a plowback ratio of 40%. There are 50,
ID: 2753136 • Letter: C
Question
Comapny X has net income of 1,000,000 and a plowback ratio of 40%. There are 50,000 shares of stock outstanding. The company plans to increase dividends by 22% each year for the next 2 years and apply a 2.25% growth rate to dividends each year indefinitely. The required return is 13%. What will this year's dividend be? What should the stock price be today? What is this years dividend yield? What is this year's capital gains yield? What will the stock be in 2 years? What will dividend yield and capital gains yield be in 2 years?
Explanation / Answer
Dividend paid= 100- %plowback=60%*1000000
Total Dividend=600000
DPS=600000/50000=$12
Using gordons 2 stage dividend discount model we get
=17.86*1.0225/(13%-2.25%)
=169.86
Stock price today should be $159.97
Dividend yield=12/159.97 [ here it is assumed that market price=expected price]
7.50%
Stock price in 2 years=17.86*1.0225/(13%-2.25%)
=169.86
Dividend yield=17.86/169.86
=10.51%
Capital gains in 2 years=169.86-159.97/159.97
=6.18%
Tenor Cash flow or dividend discount rate Present value 1 =12*1.22=14.64 13% 12.95 2 =14.64*1.22=17.86 13% 13.99 2=17.86*1.0225/(13%-2.25%)
=169.86
13% 133.02 Total Prsent Value 159.97