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
Related questions
Question
![Company Q's current return on equity (ROE) is 20%. It pays out 45 percent of earnings as cash
dividends (payout ratio 0.45). Current book value per share is $56. Book value per share will grow
as Q reinvests earnings.
Assume that the ROE and payout ratio stay constant for the next two years. After that,
competition forces ROE down to 10.0% and the payout ratio increases to 0.80. The cost of capital
is 11.0%.
Question: What is Q's stock worth per share?
O 106.1
O 121.7
O 111.6
118.2
O 74.9](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F035adc51-8a0d-4a83-9625-b4965b4c7dca%2Fc031d22b-66aa-4ff6-a28b-8bb72fab33d4%2F5ut8zsg_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Company Q's current return on equity (ROE) is 20%. It pays out 45 percent of earnings as cash
dividends (payout ratio 0.45). Current book value per share is $56. Book value per share will grow
as Q reinvests earnings.
Assume that the ROE and payout ratio stay constant for the next two years. After that,
competition forces ROE down to 10.0% and the payout ratio increases to 0.80. The cost of capital
is 11.0%.
Question: What is Q's stock worth per share?
O 106.1
O 121.7
O 111.6
118.2
O 74.9
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