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