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Help me for solving this question

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1. A company's Current price of share is Rs.60 and dividend per share is Rs.4. If its capitalisation rate is 12 Percent, What is the dividend growth rate?                                                

 
2. Ke=12%. The Company has a polocy of paying dividends at the rate of 5% on the market price of the share in the beginning of Year. Find the growth rate.                                                
 
3. ABC Ltd. is run and managed by an efficient team that insist on reinvesting 60% of its earning in projects that provide on ROE of 10%, despite the fact that the firm's capitalization rate is 15%. the firm's current earnings are expected to be Rs.10 Per share. At what price will the stock of ABC Sell?                                         
 
4. A company expects to pay a dividend of Rs.7 Next year that is expected to grow at 6%. it retains 30% of earnings. Assume a capitalization rate of 10%. You are required to a) Calculate the expected earning perr share next year (EPS), (b) Return on equity (ROE).       
Replies (2)

applying Gordon Dividend Model, the answers will be as follows:

1) P0 =60; D0=4; Ke=12%; g=?? D1=D0(1+g)

Now, P0= D1/(Ke-g)

Solving by putting values, you will get g=5%

 

2) Let intial price of share be Rs. P

Thus dividend payable comes out to be 0.05P

Now put these values in above formula, you will get g=7%

 

3) D1= EPS x (1-retention ratio)

=>D1=10(1-0.6) = Rs.4

Ke=15%

Now g=retention ratio * ROE i.e. 60*10% =6%

Put these values in above formula to get value of share = Rs. 44.44

 

4) As explained above g=retention ratio * ROE

Thus 6%=30 * ROE

Solving you get ROE=20%

Now EPS of current year = diving expected to be paid / (1-retention ratio)

i.e EPS = 7/70% = 10

growth rate= 6%, thus EPS next year will be 10*106% =Rs. 10.60

Thanks Varun


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