Brian is getting nervous about his stock holding in KalraCo.  He bought the stock three years ago at $20 per share and the price is now $65 per share.  KalraCo. has a policy of paying out 60 percent of its earnings in dividends and Brian expects the company to continue earning about 12 percent return on equity. Over the past 12 months, KalraCo. paid $2.50 in dividends.  Assume a discount rate of 15%.

 Based on Brians’s projections, is the stock overpriced at $45 per share?

Should the firm increase or decrease their payout ratio?  Explain your answer.

Answer rating: 100% (QA)

To assess whether KalraCos stock is overpriced at 45 per share we can use the Gordon Growth Model also known as the Dividend Discount Model for a perpetuity This model helps in estimating the value of ... View the full answer