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hi! this is a three part question. Please make sure to do all three parts. Please write legibly with detailed steps and explanations, so I
hi! this is a three part question. Please make sure to do all three parts. Please write legibly with detailed steps and explanations, so I can learn. many thanks!
investors and the lenders of the $ 7 billion before you can pay your employees.) - reinvests 6. Suppose that the consensus forecast of security analysts of your favorite company is that earnings next year will be $5.00 per share. The company plows back 50% of its earnings. The Chief Financial Officer (CFO) estimates that the return on this reinvestment (called the return on equity or ROE) is 16 %. That is, the growth in the firm's earnings is 50 % (the plowback ratio of 16 %, equal to 8 %. In general, with a plowback rate of b and a return on equity of ROE, the growth rate in the firm's earnings is b* ROE. Assuming the plowback ratio and the ROE are expected to remain constant forever, answer the following questions. (a) If you believe that time the company's required rate of return is 10%, what is hurdle rate your estimate of the price of the company's stock? (b) Suppose you observe that the stock is selling for $50.00 per share, what would you conclude about either your belief of the stock's required rate of return or the CFO's estimate of the company's return on equity? (a qualitative answer is sufficient) (C) Suppose that you are confident that 10% is the required rate of return on the stock. What does the market price of $50.00 per share imply about the market's estimate of the company's expected return on equity? (please give a number)Step by Step Solution
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