Question
5. You believe the Gordon (constant) growth model is appropriate to value the stock of XYZ company. The company had an EPS of $2 in
5. You believe the Gordon (constant) growth model is appropriate to value the stock of XYZ company. The company had an EPS of $2 in 2008. The earnings in the next year without the additional planned investments are expected to remain at $2. The retention ratio is 0.60. The company is expected to earn a ROE of 14% on its investments and the required rate of return is 11%. Assume that all dividends are paid at the end of the year. a. Calculate the companys growth rate. (1 point) b. Estimate the value of the companys stock at the beginning of 2009. (3 points) c. Calculate the present value of growth opportunities. (3 points) d. If the retention ratio decreases to 0.5, please explain whether the value of the companys stock will increase or decrease without calculation. (3 points)
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