A company currently has earnings (E0) of $3.00 and a dividend (D0) of $1.25.

The firms current return on equity (ROE) is 40%. The firm will maintain the

same dividend payout and ROE over the next two periods. Then it will transition

in a linear reduction in years 3, 4, and 5 to a growth of 2%. The firm will then

grow at 2% to perpetuity. The firms beta is presently 1.4, but this will transition

to 1 over the same period. The risk-free rate is 4% and the market risk premium

is 6%. ROE is expected to be 5% beginning in year 5 to perpetuity. What is the

present value of this firms equity using a three-stage model with linear transition

in years 3, 4, and 5? Please show all formulas

9. A company currently has earnings (Eo) of $3.00 and a dividend (Do) of $1.25 The firm's current return on equity (ROE) is 40%. The firm will maintain the same dividend payout and ROE over the next two periods. Then it will transition in a linear reduction in years 3, 4, and 5 to a growth of 2%. The firm will then grow at 2% to perpetuity. The firm's beta is presently 14, but this will transition to 1 over the same period. The risk-free rate is 4% and the market risk premium is 690, ROE is expected to be 5% beginning in year 5 to perpetuity. What is the present value of this firm's equity using a three-stage model with linear transition in years 3, 4, and 5? Model Description/Year Earnings Growth Rate EPS Dividend payout (DPS/EPS) Dividends per share (DPS Cost of capital (Ke) Present value of cash flows 2.0096 3.00 41.67% 1.25 10.00%