Question
Company WolfPack's current return on equity is 10% and equity beta is 1.5. It pays out one fourth of earnings as cash dividends. Current book
Company WolfPack's current return on equity is 10% and equity beta is 1.5. It pays out one fourth of earnings as cash dividends. Current book value per share is $100. Book value per share will grow as WolfPack reinvest earnings. Assume that the ROE and payout ratio stay constant for the next three years. After that, competition forces ROE down to 7.5% and the payout ratio increases to 0.6. Suppose the company is 100% financed by equity, and the market return is 12%, and the risk-free rate is 3%. Calculate the value of WolfPack's stock per share.
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