. Two-stage DCF model (S4.4) Company Q's current return on equity (ROE) is 14%. It pays out one half of earnings as cash dividends (payout ratio = 0.5). Current book value per share is $50. Book value per share will grow as Q reinvests earnings. Assume that the ROE and payout ratio stay constant for the next four years. After that, competition forces ROE down to 11.5 and the payout ratio increases to 0.8. The cost of equity is 11.5%. a. What are Q's EPS and dividends next year? How will EPS and dividends grow in years 2, 3, 4, 5, and subsequent years? b. What is Q's stock worth per share? How does that value depend on the payout ratio and growth rate after year 4?

. Two-stage DCF model (S4.4) Company Q's current return on equity (ROE) is 14%. It pays out one half of earnings as cash dividends (payout ratio = 0.5). Current book value per share is $50. Book value per share will grow as Q reinvests earnings. Assume that the ROE and payout ratio stay constant for the next four years. After that, competition forces ROE down to 11.5 and the payout ratio increases to 0.8. The cost of equity is 11.5%. a. What are Q's EPS and dividends next year? How will EPS and dividends grow in years 2, 3, 4, 5, and subsequent years? b. What is Q's stock worth per share? How does that value depend on the payout ratio and growth rate after year 4?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

See similar textbooks

Similar questions

Do not use Excel or Matrix You have to show your work 5. Zenith Co. is expected to pay $4 dividend this year, $6 dividend next year, $9 dividend the following year. After that the dividends are expected to grow at a constant rate of 3% per year. The cost of equity of Zenith is 23%. Is the value of each share of Zenith = 4 / (0.23 – 0.03)? Explain. What is the current price of the stock?
A firm has a profit margin of 2% and an equity multiplier of 2.0. Its sales are $100 million, and it has total assets of $50 million. What is its ROE? Find the following values and solve all the subparts. Compounding/discounting occurs annually. a. An initial $500 compounded for 10 years at 6%b. An initial $500 compounded for 10 years at 12%c. The present value of $500 due in 10 years at 6%d. The present value of $1,552.90 due in 10 years at 12% and at 6%e. Define present value and illustrate it using a time line with data from Part d. How arepresent values affected by interest rates?
The Farmer Co. has a payout ratio of 65% and a return on equity (ROE) of 16% (assume that this is expected ROE for the upcoming year). What will be the appropriate price-to-book value (PBV) based on return differential if the expected growth rate in dividends is 5.6% and the required rate of return is 13% ?
BB8 Mining has a payout ratio of 30% and is due to pay a dividend of $2.30 next year. The stock is currently trading at $45 and the return on equity (ROE) is 15%. Using the dividend discount model, what is the cost of equity capital for BB8?
Please answer fast i give upvote
Next year’s expected firm earnings are $4,000, shares outstanding 1000, ROE=14%capitalization rate 10%, b(plowback ratio)=10% and assuming constant growth dividends. Calculate Po and Po in a no-growth case (b=0)
A company has current, trailing earnings of 3.2 per share. The company plans to plowback 0.41, a share of the earnings, at an ROE of 0.084. If the required rate of return is 0.095, what is the present value of the firm's growth opportunities? O -2.47 -2.60 -2.74 -2.37 -2.85
Synovec Company is growing quickly. Dividends are expected to grow at a rate of 23 percent for the next 3 years, with the growth rate falling off to a constant 7 percent thereafter. If the required return is 12 percent and the company just paid a $2.60 dividend. what is the current share price? Multiple Choice O O $79.69 $83.13 $84.79
Company Z-prime's earnings and dividends per share are expected to grow by 4% a year. Its growth will stop after year 4. In year 5 and afterward, it will pay out all earnings as dividends. Assume next year's dividend is $9, the cost of equity is 9%, and next year's EPS is $14. What is Z-prime's stock price? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Stock price
NHL Inc.’s current return on equity (ROE) is 20%, its current book equity per share is $50, and it pays out half of its earnings as dividends. Both the ROE and payout ratio will stay constant for the next two years. After year 2, competition will force ROE down to 8%, and NHL will increase its payout ratio to 75%. The cost of capital is 10%. What is NHL’s stock price today?
Bubba Gum Company has an expected ROE of 9%. The dividend growth rate will be plowing back 10% of earnings. Select one: if the firm follows a policy of a. 0.9% b. 10% c. none of the above d. 90% e. 9%
Planned Obsolescence has a product that will be in vogue for 3 years, at which point the firm will close up shop and liquidate the assets. As a result, forecast dividends are DIV1 = $7.00, DIV2 = $7.50, and DIV3 = $23.00. What is the stock price if the discount rate is 11%

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS