Question
An MIT Sloan unicorn just announced its earnings of $5.00/share (for year 0), boasting a return on equity (ROE) of 12%. The management also announced
An MIT Sloan unicorn just announced its earnings of $5.00/share (for year 0), boasting a return on equity (ROE) of 12%. The management also announced an aggressive growth plan: starting from today (end of period 0) and until the end of year 1, it will reinvest all earnings into the company. Then, the start up will pay out 25% of its earnings in dividends at the end of year 2. Starting at the end of year 3, the firm will pay out 75% of earnings and will maintain this payout policy forever. Assume that the market is expecting a ROE of 12% every year onwards. Assume a constant discount rate of 10%. Note: Do not enter the $ or % sign. Use a three-digit precision in your own computations, and a two-digit precision in the result.
What was the equity book value per share at the beginning of year 0?
What will be the dividend payout per share in year 2?
What should be the company's share price today?
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