ABC Corp. pays annual dividends starting with a $2.00 dividend per share at the beginning of year 1. The required return on its stock is 15 percent and it wishes to maintain a constant growth rate in dividends.

 

If ABC has a net income 250,000, total debt of 2.5 million, debt ratio is 55%.  Calculate its ROE. 

 

If ABC Corp's plow back ratio is 60 percent, what will be the expected growth rate of its dividends? 

 

Suppose you just obtained news that leads you to think that ABC dividends will actually have an extraordinary growth of 25 percent for the two years following the next dividend. After this time the growth rate will settle into a constant rate as indicated in part (a). What should be the current share price?   

 

A few years have passed and you are at the beginning of year 4 and ABC has settled into a constant dividend policy with 9% growth rate. ABC Corp's stock price is $40 and the next forecasted dividend is $3.14 per share. 

What is the implied required rate of return in the market?

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