Question: What is Q's stock worth per share?

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
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Company Q's current return on equity (ROE) is 20%. It pays out 45 percent of earnings as cash dividends, with a payout ratio of 0.45. The current book value per share is $56. The book value per share will grow as Q reinvests earnings.

Assume that the ROE and payout ratio remain constant for the next two years. After that period, competition forces the 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?

Options:
- 106.1
- 121.7
- 111.6
- 118.2
- 74.9
Transcribed Image Text:Company Q's current return on equity (ROE) is 20%. It pays out 45 percent of earnings as cash dividends, with a payout ratio of 0.45. The current book value per share is $56. The book value per share will grow as Q reinvests earnings. Assume that the ROE and payout ratio remain constant for the next two years. After that period, competition forces the 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? Options: - 106.1 - 121.7 - 111.6 - 118.2 - 74.9
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