Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The return on equity (ROE) of Child SA is 14 per cent and it has a payout ratio of 0.5. Current book value per share

The return on equity (ROE) of Child SA is 14 per cent and it has a payout ratio of 0.5. Current book value per share is 50 and the book value will grow as the firm reinvests earnings. Assume that the ROE and payout ratio stay constant for the next 4 years. After that, competition forces ROE down to 11.5 per cent, and the payout ratio increases to 0.8. The appropriate discount rate is 11.5 per cent.

  1. What are Child's EPS and dividends next year?
  2. How will EPS and dividends grow in years 2, 3, 4, 5 and subsequent years?
  3. What is Child's share price?
  4. How does that value depend on the payout ratio and growth rate after year 4?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Personal Finance

Authors: E. Thomas Garman, Raymond E. Forgue

13th edition

1337099759, 978-1337516440, 1337516449, 978-1337099752

More Books

Students also viewed these Finance questions

Question

Express each of the following ratios in its lowest terms. 4/3 : 3/2

Answered: 1 week ago

Question

compare and contrast positivity and negativity;

Answered: 1 week ago