Total Return = ke = Dividend Yield (DY) + Capital Gains Yield (CGY) = D1/PO+ (P1 - PO)/PO D1/PO + g = Estimation of the Growth Rate (g): g = Retention Ratio * ROE Question: Tobias Industries expects to earn $100,000 this year. Earnings will grow 6% if the firm makes no new investments. Jim Tobias, CEO of the firm, has the opportunity to invest in a "new" line of business - which will complement their current products. The immediate outlay for this opportunity is $200,000 and the earnings from the line will generate $80,00 O in additional earnings (per year, in perpetuity). The earnings from this new line will grow at 4 percent. Assuming the firm's discount rate is 12%, and 200,000 shares of Tobias Industries stock is outstanding, answer the following? a) What is the price per share of Tobias stock without the cabinet line? b) What is the value of the growth opportunities which the "new" line offers? c) If the company invests in the "new" line, what would be the price of the stock?
Total Return = ke = Dividend Yield (DY) + Capital Gains Yield (CGY) = D1/PO+ (P1 - PO)/PO D1/PO + g = Estimation of the Growth Rate (g): g = Retention Ratio * ROE Question: Tobias Industries expects to earn $100,000 this year. Earnings will grow 6% if the firm makes no new investments. Jim Tobias, CEO of the firm, has the opportunity to invest in a "new" line of business - which will complement their current products. The immediate outlay for this opportunity is $200,000 and the earnings from the line will generate $80,00 O in additional earnings (per year, in perpetuity). The earnings from this new line will grow at 4 percent. Assuming the firm's discount rate is 12%, and 200,000 shares of Tobias Industries stock is outstanding, answer the following? a) What is the price per share of Tobias stock without the cabinet line? b) What is the value of the growth opportunities which the "new" line offers? c) If the company invests in the "new" line, what would be the price of the stock?
Chapter15: Dividend Policy
Section: Chapter Questions
Problem 15P
Related questions
Question
Please correct answer and don't use hand rating
Transcribed Image Text:Total Return =
ke = Dividend Yield (DY) + Capital Gains Yield (CGY)
=
D1/PO+ (P1 - PO)/PO D1/PO + g
=
Estimation of the Growth Rate (g): g = Retention Ratio * ROE
Question: Tobias Industries expects to earn $100,000 this year. Earnings will grow 6% if the
firm makes no new investments. Jim Tobias, CEO of the firm, has the opportunity to invest
in a "new" line of business - which will complement their current products. The immediate
outlay for this opportunity is $200,000 and the earnings from the line will generate $80,00
O in additional earnings (per year, in perpetuity). The earnings from this new line will grow
at 4 percent. Assuming the firm's discount rate is 12%, and 200,000 shares of Tobias
Industries stock is outstanding, answer the following?
a) What is the price per share of Tobias stock without the cabinet line?
b) What is the value of the growth opportunities which the "new" line offers?
c) If the company invests in the "new" line, what would be the price of the stock?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning