19:

Shares in Hooper & Associates are currently trading with a P/E of 8.3.

a)Under an earnings capitalisation model, what is the implied cost of equity capital?

b)Using your answer from part a, calculate the price using the dividend discount model if the current dividend is $0.50 per share and growth is expected at 5% per annum.

c)Return to the earnings capitalisation model in part a and estimate price assuming that Hooper adopts a policy of full payout of earnings that currently equate to a dividend of $0.50 per share.

d)Compare your answers to parts b and c. Why are they different? Can you reconcile the results?

e)What realistic range is the present value of growth opportunities likely to fall in?