Question 1 (4 points)

Ginsburg Bank paid a dividend of $8 per share on earnings per share (EPS) of $40 in Year 0. You are using a 2-stage Dividend Discount Model to value Ginsburg Bank based on the following assumptions:

1. High growth period of 5 years in which EPS will grow at 12% per year. In the high growth period, payout ratio will be maintained at the Year 0 level.

2. Stable growth period: EPS will grow at a constant rate of 3% forever. Payout ratio will change to x for the stable growth period.

3. Ginsburg Bank has a cost of equity of 10%.

Based on the above, you have valued the bank at $493.077 per share. (i) What is the projected dividend per share in Year 6 (D6)? (1.5 points) (ii) What is the payout ratio x for the stable growth period? (1.5 points) (iii) What is the ROE assumption for the stable growth period? (1 point)