Suppose PQR Corp. just paid a dividend of $6.75. The firm has a payout ratio of 40%, and its dividends are expected to grow in perpetuity at 6%. You estimate that its market capitalization rate is 8%.

At what price should the stock of PQR sell if it is priced by the constant dividend growth model?

(b) Decompose the price into PVGO and PV(AiP), the present value of Assets-in-Place.

(c) What is the return on book value of equity for this firm, assuming that the growth rate can be estimated by the product of the retention ratio and the return on book value of equity?

(d) Compute B0, the current book value of equity for the firm on a per share basis.

(e) Compute NPV1, the present value at t=1 of the new investment per share undertaken at t=1.

(f) Confirm your answer to PVGO in part (b) by computing PVGO using NPV1.

(g) Compute P0/E1 and P0/B0, and confirm your answer is consistent with the formulas for these in lecture notes in terms of r, a, and r.

(h) Will this firms PE ratio increase if it increases the retention ratio?