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Unformatted text preview: of earnings as dividends and retain the remaining 75%. The company has 1.25 million shares outstanding and the current stock price is $40 . The historical ROE is 11 % and it is expected to continue in the future . Step 1: find the last dividend per share paid by the firm. Step 2: find the growth rate of earnings and dividends. Step 3: Find the required rate of return for the stock. Step 1 Step 2: Step 3: 2 $ 25 . 1 25 . 10 $ m m Div % 25 . 8 % 75 % 11 * b r g % 6625 . 13 % 25 . 8 % 4125 . 5 0825 . 40 $ 0825 . 1 2 $ 1 r g P Div r...
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 Winter '08
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