Mexican Motors stock sells for 200 pesos per share and next years dividend is 8.5 pesos. Security

Question:

Mexican Motors stock sells for 200 pesos per share and next year’s dividend is 8.5 pesos. Security analysts are forecasting earnings growth of 7.5% per year for the next five years.

a. Assume that earnings and dividends are expected to grow at 7.5% in perpetuity. What rate of return are investors expecting?

b. Mexican Motors has generally earned about 12% on book equity (ROE = .12) and paid out 50% of earnings as dividends. Suppose it maintains the same ROE and payout ratio in the long-run future. What is the implication for g? For r? Should you revise your answer to part (a) of this question?

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...