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Answer :
Final answer:
The calculation of the value of Royal Hills common stock, using the Gordon Growth Model formula and given figures, results in a stock value of $45.71.
Explanation:
To calculate the value of Royal Hills common stock, we can use the Gordon Growth Model formula: P = D / (k - g), where 'P' is the price of the stock, 'D' is the dividend, 'k' is the required rate of return, and 'g' is the growth rate of the dividends.
In this case, 'D' has already been given as $3.20. The required rate of return 'k' is 14%, or 0.14. The growth rate 'g' of the dividends can be calculated as follows: the firm retains 70% of its earnings for growth, and the firm's return on equity is 10%, or 0.10, so the growth rate is 0.70 * 0.10 = 0.07, or 7%.
Plugging these numbers into the formula, we find: P = 3.20 / (0.14 - 0.07) = $45.71. Therefore, the value of Royal Hills common stock should be $45.71.
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Answer:
$48.91
Explanation:
The computation of the value of the common stock is shown below:
As we know that
Growth rate = Return on equity × retention ratio
= 10% × 0.7
= 7%
So,
The Value of the common stock = Dividend next year ÷ (Required return - growth rate)
= $3.2 × 1.07 ÷ (0.14-0.07)
= $48.91
Basically we applied the above formula so that the value of the common stock could come
