Question

uggernaut 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 $91. The historical return on equity (ROE) of 16 percent is expected to continue in the future.

Rate of return

Answer 1

Answer:-Earnings =$18 million

Earning per share =$18 million/2 million shares =$9 per share

Retention ratio =70%

Current price of stock =$91          

Return on equity = 16%

Dividend growth rate =Retention ratio*Return on equity

=0.70*0.16 =0.112 or 11.2%

Year end dividend = Year end earning*(1- Retention ratio)

=$9*(1-.70) = $2.70

Required rate of return = (Year end dividend/Current price of stock)+Dividend growth rate

= ($2.70/$91)+0.112

=14.2%