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Calculate the price of a share of megaware stock

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The dividend growth model is used by many investors to value stock. Calculate the price of a share of Megaware stock today by using the following dividend growth model equation:

P0 = E1(1 - b) / Rs = ROE × b

The value of the stock equals next year's dividends divided by the sustainable growth rate

  • The dividend-payout ratio is 1 minus b, where b is the retention ratio. The dividend next year (P0) will be the earnings next year (E1) times 1 minus the retention ratio: P0 = E1(1 - b).
  • The sustainable growth rate (Rs) is the return on equity (ROE) times the retention ratio: Rs = ROE × b.

Based on your results, should Megaware pay a dividend or expand its manufacturing capability? Explain your decision.

Reference no: EM131560308

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