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2. (25 points) Here are the forecasts for next year for three companies. Earnings per share (EPS) Dividend payout rate ROE Company A $5 40%
2. (25 points) Here are the forecasts for next year for three companies. Earnings per share (EPS) Dividend payout rate ROE Company A $5 40% 25% Company B $5 55% 20% Company C $5 64% 15% The cost of equity for each firm is 20%. Assume that the dividend payout rate and the ROE for each firm will remain constant every year forever a. (5 points) Calculate the expected dividend growth rate for each firm. b. (10 points) What is the stock price today (P.) for each firm? Assume that each stock is correctly priced, so the stock price for each firm is equal to its intrinsic value. c. (5 points) How much of the stock price for each firm represents the net present value of the expected future investments? d. (5 points) Suppose that each firm announces an increase in the dividend payout rate from the current payout rate to 100%. How will this announcement affect: i. the stock price (Po) I ii. the P/E ratio (P/E) for each firm? (Will the stock price and the P/E ratio increase or decrease and by how much?)
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