The Baron Basketball Company (BBC) earned $ 10.00 a shares last year and paid a dividend of $ 6.00 a share. Next year, you expect BBC to earn $ 11.00 and continue its payout ratio. Assume that you expect to sell the stock for $ 132.00 a year from now. If you require 12 percent on this stock, how much would you be willing to pay for it?
- Over the long run, you expect dividends for BBC in problem 4 to grow at 8 percent and you require of 11 percent on the stock. Using the infinite period DDM, how much would you pay for this stock?
- The Shamrock Dogfood Company (SDC) has consstently paid out 40 percent of its earning in dividends. The company's return on equity is 16 percent. What would you estimate as its dividend growth rate?
- What P/E ratio would you apply if you learned that SDC had decided to increases its payout to 50 percent? (Hint: This change in payout has multiple effects.)