GDL, Inc., has an ROE of 17.6% and the EPS at the end of the year is expected to be $6. It intends to plowback 28% of its earnings and the required rate of return on its stock is 10.8%. What is the current stock price? Round your answer to two decimal places (e.g, 4.56).
| As per dividend discount model, | |||||||||
| Price of stock | = | D1/(Ke-g) | Where, | ||||||
| = | 4.32/(10.80%-4.93%) | D1 | $ 4.32 | ||||||
| = | $ 73.59 | Ke | 10.80% | ||||||
| g | 4.93% | ||||||||
| Working: | |||||||||
| # 1 | Dividend at year end 1 (D1) | = | Earning per share * (1-plowback ratio) | ||||||
| = | 6*(1-0.28) | ||||||||
| = | $ 4.32 | ||||||||
| # 2 | Growth in dividend | = | ROE*plowback | ||||||
| = | 17.6%*28% | ||||||||
| = | 4.93% | ||||||||
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