Question
Rio National Corp. management has signed a new marketingagreement that will allow the company to sell its products in Southeast Asia. Sophie Delourme, an analyst
Rio National Corp. management has signed a new marketingagreement that will allow the company to sell its products in Southeast Asia. Sophie Delourme, an analyst at Euro-International Co., is analyzing the effect of this announcement on her estimate ofRio National's stock value. She uses the H-model in her valuation process and has identified the following inputs:
Rio National's earnings growth rate is expected to be 30.0 percent in 20X3,declining over a five-year period to a constant growth rate of 12.0 percent in 20X8 and thereafter.
- Because of the change in risk, the required rate of return (cost of equity)for Rio National is expected to be 13.5 percent.
- The dividend per share for 20X2 was $0.20.
- The dividend payout ratio is expected to be constant.
- Which of the following is the estimated value of a share of Rio National'sequity on 31 December 20X2, using H-model?
a.$17.55
b.$25.00
c. $20.93
d. $26.93
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