A stock sells for . The next dividend will be per share. If the rate of return earned on reinvested funds is 15 percent and the company reinvests 40 percent of earnings in the firm, what must be the discount rate?
A stock sells for . The next dividend will be per share. If the rate of return earned on reinvested funds is 15 percent and the company reinvests 40 percent of earnings in the firm, what must be the discount rate?
Tags: dividend, earnings, rate of return, stock
This entry was posted on May 3, 2010, 2:27 am and is filed under Discount Blog. You can follow any responses to this entry through RSS 2.0. Both comments and pings are currently closed.
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#1 by csanda on May 3, 2010 - 2:27 am
This question is asking for an annuity valuation on a dividend discount model.
Assuming no taxes.
NPV = Coupon / (r – g)
$40 = $4 / (r – g)
$40 = $4 / [r - (retained profits x 15%)]
$40 = $4 / [r - (60% x 15%)]
$10 = 1/(r-9%)
1/10 = r – 9%
0.10 + .09 = r
r = 19%