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

Learn more about this topic:

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
9.4K

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