# I can't get this easy one

89 Yakamichi Corp. paid \$1.75 annual dividend last year and distributed 67 percent of its earnings to shareholders. The firm’s projected ROE is 12.5 percent. If investors require 14 percent rate of return on this stock, the estimated value of Yakamichi’s stock is closest to: A \$17.00 B \$17.75 C \$18.50 D \$19.25

use DDM p = D1/(rk - g) g= 12.5 x 33 = 4.1% p = 1.89/ .14 - .041 I get 19.09 D

67% distributed => 33% retained earnings => g=.33*12.5= 4.125 P=1.75*1.04125/(.14-.04125) = 18.4525~18.5?

I get closer to 18.45 when I do it. 1-.67)*12.4 = 4.125 1.75*1.04125/14-4.125

0.67*E = \$1.75, E=\$2.61M P/E = (D1/E) / (k-g) P/2.61 = (1.75*1.0412/2.61) / (.14-g) g=0.67*.125= 4.12% P=19.25

There’s an error in your calculus Dreary, and Earnings gets reduced from both sides, it has no effect.

c

map, theres probably error in your calculation too. 1,.75 says dividend of last year. so this year’s dividend is 1.75 * 1.04125 and multiply that by another 1.04125 to get next years dividend.

You’re right, no need for the extra E, but I think answer should be correct.

pepp, i think that’s taken care of in “projected” ROE

P=D1/(k-g) =\$1.75*1.04125 /(0.14-0.04125) = \$18.45

i got 18.45, same calculations as the people above. The answers must be off.