Given that the firm earns 10% on equity of $100 and pays out 40% of earnings in dividends, what’s the price of the stock at the beginning of second period? A) $106 B) $103 C) $109

A - 106 100*(.1*.6) = 106

100*(1+0.1*1-.4)=106

Excuse me. (100*(.1*.6))+100 = 106

Nice work, guys. Pretty straight-forward.

Can someone please explain the calculation here? I don’t remember seeing this in the book

its jus calculating the g thing…that is rr*roe = .60*.10 and den since g=6, 100*1.06 = 106

It seems to be a straight foward calculation without any formula. Earn 10% on the $100 of equity. Of the earned money (the $10 bucks) you pay 40% of that out in dividends (pay out $4). Whats left after you have accounted for your earnings and paid out your divs…$106.