The Farmer Co. has a payout ratio of 65% and a return on equity (ROE) of 16% (assume that this isexpected 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 ofreturn is 13% ?

Given;Payout ratio: 65%Return on equity (ROE): 16%Expected growth rate in dividends (g):…

Answered: The Farmer Co. has a payout ratio of…

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

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Calculate the required rate of return for Mudd Enterprises assuming that investors expect a 3.9% rate of inflation in the future. The real risk-free rate is 1.5%, and the market risk premium is 7.5%. Mudd has a beta of 2.7, and its realized rate of return has averaged 14.5% over the past 5 years. Round your answer to two decimal places. %
The level of the Syldavia market index is 21,900 at the start of the year and 26,400 at the end. The dividend yield on the index is 4.7%. What is the return on the index over the year? If the interest rate is 6%, what is the risk premium over the year? If the inflation rate is 8%, what is the real return on the index over the year? Note: For all requirements, do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places.
Trend-Line Inc. has been growing at a rate of 6% per year and is expected to continue to do so indefinitely. The next dividend is expected to be $8 per share. a. If the market expects a 10% rate of return on Trend-Line, at what price must it be selling i.e. Current selling price?
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Yesterday, Michelin paid a dividend of $2.25 (D0). You are considering buy Michelin stock today. Your required rate of return for their equity is 10% (r). You expect that their dividend will grow at 4% per year (g). Assume that dividends are paid annually. According to the Dividend Discount Model, what should be the price per share of Michelin?
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A firm pays a current dividend of $1.00 which is expected to grow at a rate of 5% indefinitely. If current value of the firm’s shares is $35.00, what is the required return based on the constant-growth dividend discount model (DDM)?
An analyst believes that inflation is going to increase by 2.0% over the next year, while the market risk premium will be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM). The following graph plots the current SML. Calculate Happy Corp.'s new required return. Then, on the graph, use the green points (rectangle symbols) to plot the new SML suggested by this analyst's prediction. Happy Corp.'s new required rate of return is Tool tip: Mouse over the points on the graph to see their coordinates. REQUIRED RATE OF RETURN (Percent) 1.2 1.6 2.0 0.8 RISK (Beta) New SML ? The SML helps determine the risk-aversion level among investors. The higher the level of risk aversion, the the slope of the SML. Which of the following statements best describes the shape of the SML if investors were not at all risk averse? O The SML would be a horizontal line. O The SML would have a negative slope. O The SML would have a positive slope, but the slope would be steeper than it would be if…
You forecast the company A’s future earning is going to be $5.34 per share. The current market price is $55. What the market forward PE ratio? The estimated growth rate is 10%, what is the PEG ratio based on your estimate of growth rate? The industry average has a P/E ratio of 14 and growth rate of 12%, what does it mean for A’s stock price?
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Mackenzie Company has a price of $31 and will issue a dividend of $2.00 next year. It has a beta of 1.5, the risk-free rate is 5.4%, and the market risk premium is estimated to be 4.8%. a. Estimate the equity cost of capital for Mackenzie. b. Under the CDGM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a)?

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