Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected
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Step 1
In the given case, Expected ROE and firm's payout ratio is given . Retention ratio is calculated as 1- payout ratio .
Constant growth rate is calculated as ROE* Retention ratio .
Since , expected EPS is given , so expected dividend is calculated as the expected EPS * Payout ratio .
And, the market capitalization rate on the stock is already given . It is the cost of equity (Ke) .
Therefore,
We calculated the value of the stock using constant dividend growth model ,
Value of stock (P0) = Expected dividend / (market capitalization rate - constant growth rate)
Explanation:
Value of the stock is the current market price of a stock. It means if that stock is to be sold at today, then value of the stock is the current selling price .
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