Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

XYZ Inc. has expected earnings over the next year of $2/share (E1 = 2). The company is expected to maintain an earnings retention rate of

XYZ Inc. has expected earnings over the next year of $2/share (E1 = 2). The company is expected to maintain an earnings retention rate of 40%, i.e., 60% of earnings are expected to be paid out as dividends every year. The company has a beta of 1.5, the risk-free rate is 4%, and the market risk premium is also 4%.

If the growth rate in earnings is expected to be 5% in perpetuity

i. What is the value of the stock?

ii. What is the expected price a year from now?

iii. What is the expected holding period return over the next year? How much of this return is due to capital gains (price appreciation = P1/P0-1) and how much is attributable to dividend yield (D1/P0)?

iv. What ROE justifies this growth rate?

v. What is the present value of growth opportunities for this stock?

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

International Financial Reporting Standards An Introduction

Authors: Belverd Needles, Marian Powers

2nd edition

053847680X, 978-1111793234, 1111793239, 978-0538476805

More Books

Students also viewed these Finance questions

Question

What is a budget? (p. 314)

Answered: 1 week ago

Question

Describe five properties of a normal distribution. L01

Answered: 1 week ago