Given the following information, what would the expected industry rate of return equal?
Dividend payout= 30%
Net earnings estimate= $12.62/share
Multiple estimate= 19 -
Current earnings index= 225.50 -
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A. B. C. D. E.C
Expected industry return = (Index estimate - Current index + Dividend) / Current index = (239.78 - 225.50 + $3.79) / 225.50 = 8.0%
Index estimate = $12.62 x 19 = 239.78
Dividend = .30 x $12.62 = $3.79
To calculate the expected industry rate of return, we need to use the dividend discount model (DDM) approach. The DDM calculates the intrinsic value of a stock based on the present value of its expected future dividends.
First, let's calculate the expected dividend per share (DPS): DPS = Dividend payout * Net earnings estimate = 0.30 * $12.62/share = $3.786
Next, we need to determine the expected dividend yield (DY), which is the expected dividend per share divided by the current stock price. The multiple estimate given is the price-to-earnings (P/E) ratio, so we can use it to calculate the current stock price (P0): P0 = Current earnings index / Multiple estimate = 225.50 / 19 = $11.868
DY = DPS / P0 = $3.786 / $11.868 ≈ 0.319
The expected dividend yield represents the expected return from dividends. To calculate the expected capital appreciation rate (g), we can use the formula:
g = (Net earnings estimate * (1 - Dividend payout)) / (Current earnings index * Multiple estimate) = ($12.62/share * (1 - 0.30)) / (225.50 * 19) ≈ 0.014
The expected capital appreciation rate represents the expected return from capital gains.
Finally, to calculate the expected industry rate of return, we add the dividend yield and the capital appreciation rate:
Expected industry rate of return = DY + g ≈ 0.319 + 0.014 ≈ 0.333
The expected industry rate of return is approximately 33.3%. However, none of the provided answer choices match this result exactly.