Question

Chiptech, Inc., is an established computer chip firm with several profitable existing products as well as some promising new products in development. The company earned $1 per share last year and just paid out a dividend of $.50 per share. Investors believe the company plans to maintain its dividend payout ratio at 50%. ROE equals 20%. Everyone in the market expects this situation to persist indefinitely.
What is the market price of Chiptech stock?

Answer 1

Answer:

$11

Explanation:

"The required return for the computer chip industry is 15%, and the company has just gone ex-dividend (i.e., the next dividend will be paid a year from now, at t 1) (Round your answer to 2 decimal places.)"

g = ROE*b

g = ROE * (1-Payout ratio)

g = 20% * (1-0.5)

g = 10%

P0 = D1/k-g

P0 = D0(1+g) / k-g

P0 = 0.5(1+0.10) / (0.15+0.10)

P0 = $11

S0, the market price of Chiptech stock is $11