XYZ Corporate starts with $20,000 book value of equity capital and zero debt. The ROE for the company is 15% and the required rate of return for the company is 12%. There are 500 shares outstanding. Now, XYZ Corporation decides that it will always reinvest 60% of earnings back in the company and pay out 40% of earnings each year in dividends to the shareholder. Thus, dividends for this company will grow at a constant rate.

What are the dividends per share (DPS) in the first year?

1. What is the book value of the company at the beginning of the second year?

2. How much cash flow does the company earn in the second year?

3. What are the earnings per share (EPS) in the second year?

4. How much cash is paid out in dividends in the second year?

5. What are the dividends per share (DPS) in the second year?

6. What is the growth rate in dividends from the first year to the second year?

7. Using this information about the dividends and their growth rate, and the constant growth stock pricing formula, calculate the price of share of stock for XYZ company in the first year?

8. Calculate the market value added (MVA) for XYZ Corporation in the first year?