Qbank Question #2406

Can someone please advise how they are getting the dividend0 of 2 dollars? I keep getting 5.00 x 1.09 = 5.45. This throws off my entire cost of equity calculation. How come they are using 5 x .4 = 2.00, when the equation is next year dividend/price plus growth rate? I hope this makes sense, hopefully someone can help me! Thanks

It is [( 5.00 x 0.4 x 1.09 ) / 42.00] + 0.09 = 14.19% You can calculate the earnings in Y1 and calculate the dividend in Y1 or use the dividend in Y0 multiplied by the growth rate to get the dividend in Y1

how come the .4 is in the mix? I thought it was just next years dividend? sorry still a little confused thanks for your help

"Last year’s earnings were 5.00 per share and the dividend was just paid to shareholders" The 5 is EPS, and given that dividend was just paid, the paid out ratio is 40%, so to get the D0, we multiply dividend pay out ratio with EPS(=0.4X5), which gives us $2. Once we determine this we have to get D1. The growth rate equals (1-D/EPS)*ROE, which is also Retention Rate*ROE=(1-0.4)*0.15=9% D1 therefore equals 2.18 and re=2.18/42+0.09=14.19% I think the key to the question is determining Dividend at time 0, then Dividend at time 1-in which we must use the dividend pay out ratio to establish D0, then apply growth rate to arrive at D1. Multiplying 5x1.09, assumes all earnings are paid out as dividends. Hope this helps.

Dividend payout is constant over the years (0.4) 5.00 x 1.09 = 5.45 – Earnings in Y1 5.45 x 0.4 = 2.18 – Dividend in Y1 After calculating D1 you use the DDM to calculate the ke (cost of equity)

have posted a question on margin maintenance…can u help?