Colins Company current return on equity (ROE) is 16%. It pays out one-quarter of earnings as cash dividends. Current book value per share is $35. The company has 5 million shares outstanding. Assume that ROE and payout ratio stay constant for the next four years. After that, competition forces ROE down to 10% and the company increases the payout ratio to 60%. The company does not plan to issue or retire shares. The cost of capital is 9.5%.

Please explain in steps

1. Create a table starting at period 1 with relevant information (earnings, investment

and dividends) in order to compute the present value of the dividends for the next four years.

2. What is the terminal value?

3. What is the current value of Colins stock?

4. How much of Colins stock value is attributable to growth opportunities (PVGO).

[Hint Recall that the relevant earnings are the sustainable long-run earnings under no-growth.]