Question
If ROE > rS, then a company will increase shareholder value (stock price will go up) when retaining earnings and reinvesting them within the company.
If ROE > rS, then a company will increase shareholder value (stock price will go up) when retaining earnings and reinvesting them within the company. Assume a firm has ROE = 20% and rS=15%. Next period's earnings (E1) will be $8 per share. Calculate the share price if the firm retains 25% of its earnings (and pays out 75% as a dividend).
Calculate the share price if the firm retains 50% of its earnings (and pays out 50% as a dividend). What is the difference in price?
Step by Step Solution
3.48 Rating (151 Votes )
There are 3 Steps involved in it
Step: 1
To calculate the share price we can use the Gordon Growth Model P D1 E1 x retention ratio rS ...
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Principles Of Managerial Finance
Authors: Lawrence J. Gitman, Chad J. Zutter
13th Edition
9780132738729, 136119468, 132738724, 978-0136119463
