Question
Company ABC has a book value of $100 per share. Investors demand an expected return of 10%. a) For the next three years, the return
Company ABC has a book value of $100 per share. Investors demand an expected return of 10%. a) For the next three years, the return on equity (ROE) will be 15% and the payout ratio will be 0.3. After year 3, the ROE will drop to 10% and the payout ratio increase to 0.6. What is the stock value per share today? What are ABCs price to earnings ratios (P/E) for the next 4 years? b) Re-do part (a) if the payout ratio in the next three years increases to 0.6 and all the other assumptions remain the same as in part (a)). Is the price lower or higher than the price in part (a) and by how much? c) Re-do part (a) if the payout ratio after three years increases to 0.9 and all the other assumptions remain the same as in part (a). Is the price lower or higher than the price in part (a) and by how much? d) Explain the changes in share price in part (b) and (c)
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