Question

2. Juggernaut Satellite Corporation earned $10 million for the fiscal year ended yesterday. The firm also paid out 25 percent of its earnings yesterday and the firm will continue to pay out 25 percent of its earnings as annual, end-of-the-year dividends. The remaining 75 percent of earnings is retained by the company for use in projects. The company has 1.25 million shares of common stock outstanding. The current stock price is $30. The historical return on equity (ROE) of 12 percent is expected to continue in the future.​​​​​​
   1. What is Juggernaut’s EPS today?
   2. Given the information in part a and above, what is the company’s dividend today (Div0), what is the company’s expected growth rate, and what is next year’s dividend (Div1)?
   3. What is the expected rate of return for Juggernaut?

Answer 1

Answer a.

Earnings per share, EPS0 = Net Income / Number of shares outstanding
Earnings per share, EPS0 = $10 million / 1.25 million
Earnings per share, EPS0 = $8.00

Answer b.

Payout Ratio = 25%
Retention Ratio = 75%

Dividend per share, D0 = EPS0 * Payout Ratio
Dividend per share, D0 = $8.00 * 25%
Dividend per share, D0 = $2.00

Growth Rate = Return on Equity * Retention Ratio
Growth Rate = 12% * 75%
Growth Rate = 9%

Expected Dividend per share, D1 = $2.00 * (1 + 0.09)
Expected Dividend per share, D1 = $2.18

Answer c.

Expected Rate of Return = Expected Dividend per share / Current Price + Growth Rate
Expected Rate of Return = $2.18 / $30.00 + 0.09
Expected Rate of Return = 0.1627 or 16.27%