Question
JQT Corporation just paid a dividend of $3.65 per share which represents 60% of its profit after tax. Its return on shareholder's equity is expected
JQT Corporation just paid a dividend of $3.65 per share which represents 60% of its profit after tax. Its return on shareholder's equity is expected to remain constant at 11% per annum for ever. JQT stock is listed on a stock exchange and is trading at $91.63 per share. If the market believes the 60% payout ratio will continue for ever, and if everyone uses the constant growth dividend discount model to value JQT stock:
(a) what is the earnings growth rate?
(b) what rate of return are investors apparently requiring? Instead you think JQT will pay out 60% for the first two dividends, then increase the payout ratio to 80% from the third dividend onwards.
(c) How much will be the dividend in year 3?
(d) If your required rate of return is 14.5% per annum, how much would you be willing to pay for JQT?
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