Question

The KJ Corporation has averaged an ROE of							16%	over
the past 5 years and that should continue into the
future. The firm has a payout ratio of							80%	on
earnings per share of				$5.16	and paid the dividend
yesterday. The discount rate for a firm of KJ's
risk level is			13%
a)	What is the expected Growth Rate of KJ's dividend?
b)	What is KJ's current stock price?

Answer 1

a) Dividend growth rate = ROE*(1-dividend payout ratio)
ROE =		16%
Payout ratio =		80%
Dividend growth rate = 16%*(1-80%)
		3.20%
b) we can use the dividend discount model to compute the share price
price = expected dividend/(required rate - growth rate)
Expected dividend =			=5.16*80%*103.2%
			4.26
price = 4.26/(13%-3.2%)
			43.47