Question

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?

Answer #1

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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Common Stockholders' Profitability Analysis
A company reports the following:
Net income
$120,000
Preferred dividends
4,800
Average stockholders' equity
975,610
Average common stockholders' equity
587,755
Determine (a) the the return on stockholders’ equity and (b) the
return on common stockholders’ equity. If required, round your
percentages to one decimal place.
a. The rate earned on stockholders'
equity
%
b. The rate earned on common stockholders'
equity
%
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