Which of the following is true for a firm having a stock price of $42,and expected dividend of $3,and a sustainable growth rate of 8 percent?
A) it has a required return of 15.14percent.
B) it has a dividend payout ratio of 37.5 percent.
C) it has an ROE of 7.14 percent.
D) it has a plowback rate of 7.14 percent.

Question

Quizplus · Accepted Answer

Using the constant growth model, we can calculate the required return as follows:
Stock price = (dividend / (required return - growth rate))
$42 = ($3 / (required return - 8%))
required return = 15.14%
Therefore, choice A is true.

The dividend payout ratio can be calculated as:
Dividend payout ratio = (Dividend / Earnings) x 100
We do not have any information about earnings, so we cannot calculate the dividend payout ratio. Therefore, choice B is false.

The ROE can be calculated as:
ROE = Net Income / Equity
We do not have any information about net income or equity, so we cannot calculate the ROE. Therefore, choice C is false.

The plowback rate can be calculated as:
Plowback rate = 1 - Dividend payout ratio
We do not have the dividend payout ratio, so we cannot calculate the plowback rate. Therefore, choice D is false.

Which of the Following Is True for a Firm Having