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6: Pro Build Inc. has had a net income of $16 million in its most recent...

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?

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Answer #1

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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