Question
DCI Corp. recently had earnings per share of $6 and a dividend payout of $3 per share. Its ROE was 20%. DCI will maintain the
DCI Corp. recently had earnings per share of $6 and a dividend payout of $3 per share. Its ROE was 20%. DCI will maintain the same ROE and plowback ratio for the next two years. After that time DCI will maintain the same plowback ratio as before but it will enter a period of 3% constant growth. It was determined that DCI has a beta of 1.25 while the risk-free rate is 3% and the expected return on the market portfolio is 7%. Assume a constant discount rate throughout the entire period.
1) Determine the fair value of DCI Corp.
2) Consider what the firms plowback ratio should be in the second period of growth.
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