Suppose that Son of Son of Unkempt Inc. common stock will pay an annual dividend
ID: 2775666 • Letter: S
Question
Suppose that Son of Son of Unkempt Inc. common stock will pay an annual dividend next year of $14.05, has
net income of $562 million, is keeping back $178 in retained earnings, has common book value of $9,289
million, has a beta with respect to the market of 0.95 times (where the average yearly market return is 15% and
the average yearly risk free rate is 4.5%), what would the common stock be worth on a per share basis? If there
are 23 million shares outstanding, what is its market capitalization?
Explanation / Answer
Answer: The common stock be worth on a per share basis:
=$9289/23=$403.87
Ke=Rf+Beta[(E(rm)-Rf)]
=4.5%+0.95[(15%-4.5%]
=14.475%
Market capitalization=$562/14.475%=3882.56