Question

# In the past year, the Canadian Company paid \$38,100 in dividends on the company's equity of...

In the past year, the Canadian Company paid \$38,100 in dividends on the company's equity of \$1,587,500. The company had net earnings of \$127,000 with an ROE of 8%. If the company has 100,000 shares outstanding with a current market price of \$11.0625 per share, what is the required rate of return?

Dividend payout ratio = Dividend paid / Net income

Dividend payout ratio = \$38,100 / \$127,000

Dividend payout ratio = 30%

Retention ratio = 1 - Dividend payout ratio

Retention ratio = 1 - 30%

Retention ratio = 70%

Growth rate = Retention ratio * Return on Equity

Growth rate = 70% * 8%

Growth rate = 5.6%

Dividend per share = Dividend paid / Shares outstanding

Dividend per share = \$38,100 / 100,000

Dividend per share = \$0.381

Current market price = Dividend per share * (1 + growth rate) / (Required rate of return - growth rate)

\$11.0625 = \$0.381 * (1 + 5.6%) / (Required rate of return - 5.6%)

Required rate of return = (\$0.381 * (1 + 5.6%) / \$11.0625) + 5.6%

Required rate of return = 9.24%

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