Question

A)Shield Corp. expects an earnings per share of $2.43 and reinvests 20% of its earnings. Management projects a rate of return of 9% on new projects and investors expect a 9% rate of return on the stock. What is the sustainable growth rate? Enter your answer as a percentage. Do not include the percentage sign in your answer.

b)what would the price of the stock with no growth?

Enter your response below rounded to 2 DECIMAL PLACES.

Answer #1

a. Sustainable growth rate (g)=Retention ratio*Return on equity

retention ratio=20% (retains 20% of earnings)

Return on equity=9%

Sustainable growth rate=20%*9%=1.8%

b. If growth rate=0

Price of stock=Dividend1/(rate of return on stock-growth rate)

Dividend payout ratio=(1-retention ratio)=(1-20%)=80%

dividend0=EPS*payout ratio=$2.43*80%=$1.944

Dividend1 will be the same as Dividend0 because of growth no growth rate

rate of return of stock=9%

Price of Stock=$1.944/(9%-0%)=$21.6

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