Week 8 Homework AssignmentChapter 715.g = return on equity plowback ratio = 0.15 0.40 = 0.06 = 6.0%40 =44r=+ 0.06 = 0.16 = 16.0%r 0.0640Explanation: To get the discount rate asked of in this problem, we need to determine first thepercentage of the growth rate. We use the formula g = return on equity x plowback ratio toget this. The return on equity being the constant rate of 15% which is the rate of returnearned on the companys reinvested funds. The plowback ratio is the 40% portion ofearnings that the company reinvests. Now, in order to get the discount rate, we make useof the formula to get the selling price of the stock which is selling price = dividend pershare divided by the difference between the discount rate and the growth rate. From thisformula we transpose it to derive with a formula to determine the discount rate, whichwould now be discount rate = divididend per share divided by selling price, and add to thisthe 6% growth rate. Substituting the values for this formula, we now get the discount ratewhich is 16%.Est time: 01-05Constant-growth stock16.a.P0 =DIV1$3 1.05== $31.50r g 0.15 0.05Explanation: To get the selling price for the stocks using the constant-growth rate model, weuse the formula selling price = dividend per share divided by the difference between thediscount rate and the growth rate. We use here the 15% discount rate as provided for in theproblem. Consequently substituting the v ...
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