Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Company Q's current return on equity (ROE) is 14%. It pays out 60 percent of earnings as cash dividends (payout ratio = 0.60). Current book

image text in transcribed

Company Q's current return on equity (ROE) is 14%. It pays out 60 percent of earnings as cash dividends (payout ratio = 0.60). Current book value per share is $70. Book value per share will grow as Q reinvests earnings. Assume that the ROE and payout ratio stay constant for the next four years. After that, competition forces ROE down to 12.5% and the payout ratio increases to 0.90. The cost of capital is 12.5%. a. What are Qs EPS and dividends in years 1, 2, 3, 4, and 5? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Year EPS Dividends 1 $ 6.28 2 $ 11.18 $ 6.71 11. 4 $ 12.75 $ 7.66 5 $ 12.91 $ 11.62 b. What is Q's stock worth per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Stock worth per share $ 85.18

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Psychology Of Trading Tools And Techniques For Minding The Markets

Authors: Brett N. Steenbarger

1st Edition

0471267619, 9780471267614

More Books

Students also viewed these Finance questions