6: Pro Build Inc. has had a net income of $16 million in its most recent year. Net income is expected to grow by 3% per year. The firm always pays out 10% of net income as dividends and has 7 million shares of common stock outstanding. The required return is 13%.
What is the current stock price?
Solution>
Net Income = $ 16 Million
Dividend Payout ratio = 10%
Cost of Equity = 13%
Dividend paid = $ 16,000,000 * 0.10 = $ 1,600,000
No of Shares outstanding = $ 7,000,000
Dividend per share = $ 1,600,000/$ 7,000,000= $ 0.2286
Growth rate = 3%
Since the dividend pay out is a constant 10% of earnings, dividends also grow at 3%
Next year Dividend = $ 0.2286 * 1.03 = $ 0.2354
Current Stock Price = $ 0.2354 /(0.13 – 0.03) = $ 2.354
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