Company Q’s current return on equity (ROE) is 12%. It pays out 40 percent of earnings as cash dividends (payout ratio = 0.40). Current book value per share is $64. 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 10.5% and the payout ratio increases to 0.90. The cost of capital is 10.5%. a. What are Q’s EPS and dividends in years 1, 2, 3, 4, and 5? (Do not round intermediate calculations. Round your answers to 2 decimal places.) b. What is Q’s stock worth per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Company Q’s current
Assume that the ROE and payout ratio stay constant for the next four years. After that, competition forces ROE down to 10.5% and the payout ratio increases to 0.90. The cost of capital is 10.5%.
a. What are Q’s EPS and dividends in years 1, 2, 3, 4, and 5? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
b. What is Q’s stock worth per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
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