Berberich Corporation net income this year is $800,000.The company generally retains 35% of net income for reinvestment.The company's common equity currently has a book value of $5,000,000.They just paid a dividend of $1.37,and the required rate of return on this stock is 12%.Compute the value of this stock if dividends are expected to continue growing indefinitely at the company's internal growth rate.

Question

Quizplus · Accepted Answer

The internal growth rate is calculated as the retention ratio (35%) multiplied by the return on equity (net income/book value of equity). The dividend growth rate is then used in the Gordon Growth Model to find the stock value: P = D1 / (r - g).

Berberich Corporation Net Income This Year Is $800,000