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2. Sunshine Co. has a return on equity of 15% and a cost of capital of 8%. The company is adopting a payout ratio of
2. Sunshine Co. has a return on equity of 15% and a cost of capital of 8%. The company is adopting a payout ratio of 0.6, and the dividend expected one year from now is $4.5. (a) Based on the dividend growth model with a constant return on equity and payout ratio, what is the current stock price? [3 marks] (b) An analyst has the following belief about Sunshine Co.'s future development: The return on equity will remain at 15% for the next five years, and decrease to 10% thereafter. The payout ratio will remain at 0.6 for the next five years, and increase to 0.8 thereafter. Calculate the current stock price based on this analyst's belief. [6 marks] [Total: 9 marks]
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