# PDQ Corporation is forecast to have total earnings of $1 billion next year and to pay out a total...

## Question:

PDQ Corporation is forecast to have total earnings of $1 billion next year and to pay out a total of 25% of these earnings to shareholders in the form of share repurchases and dividends. PDQ Corporation has 100 million shares outstanding. Its earnings are forecast to grow at a rate of 6% constantly. The stock's required rate of return is 10%. What is the value of a share today?

## Dividend Payout:

Dividend payout is the amount of payments a firm distributes to its shareholders in the form of dividends. Total dividend payout is total earnings time the dividend payout ratio.

## Answer and Explanation:

We first compute dividend per share:

- dividend per share = earnings * dividend payout ratio / number of share
- dividend per share = 1 billion * 25% / 100 million
- dividend per share = 2.5

Then we can use the dividend growth model to compute the price per share of the stock, as follows:

- price per share = next dividend / (required return - dividend growth rate)
- price per share = 2.5 / (10% - 6%)
- price per share = 62.5

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