Question

Shackleford Corporation net income this year is $800,000. The company generally retains 35% of net income for reinvestment. The company's common equity currently has a book value of $5,000,000. They just paid a dividend of $1.37, and the required rate of return on this stock is 12%. Compute the value of this stock if dividends are expected to continue growing indefinitely at the company's internal growth rate.A) $11.42 B) $15.63 C) $4.35 D) $22.61

Answer 1

Answer:

price of the stock = $22.61

so correct option is D) $22.61

Explanation:

given data

net income = $800,000

retains = 35%

book value = $5,000,000

paid dividend = $1.37

rate of return = 12%

to find out

value of this stock if dividends are expected to continue growing indefinitely at the company's internal growth rate

solution

we get here first  growth rate that is express as

growth rate = $\frac{net\ income}{total\ equity}$ × retains    ........1

put here value

growth rate = $\frac{800000}{5000000}$ × 35%

growth rate = 5.6%

and

price of the stock will be here

price of the stock = paid dividend × $\frac{1+growth\ rate}{rate\ of\ return}$  -  growth rate     ...............2

put here value

price of the stock = 1.37 × $\frac{1+0.056}{0.12}$  -  5.6%

price of the stock = $22.61

so correct option is D) $22.61