An investor purchased stock in a companyfor $20 at the end of a year for which the company reported EPS of $4.00. Due to capital investment needs, the company retains 75% of earnings and intends to maintain this retention rate in the future. Return on equity (ROE) is constant at 33.3%. If the expected price of the stock in one year is $25, the expected I-year holding period return on this stock is: A. 12.25%. B. 24.00%. C. 28.50%. D. 31.25%.
Calculate the future dividend: g=ROE*RR=33.3*75%=24.975% Current dividend=(1-75%)*4=1, that makes future dividend =1*(1+24.975%)=1.24975 HPR=(25-20+1.24975)/20=31.24875~31.25, should be D.
That’s good map1, I thought it was B, I didn’t use next yrs dividend, I used $1
map1 has this covered, but… g= .75*.333 = .24975 EPS = 4 (1+.24975) EPS=4.999 Dividend = EPS * payout = 4.999*.25 1.24 Dividend = 1.24975 HPR = (25+1.24975-20)/20 HPR = .31248
map1, you’re the man! Thanks. Always forgot to add the dividend payment to calculate the holding return. Thanks guys!