Question
You are considering a potential investment in a company that appears to be a great value. The company is expected to earn $9.50 per share
You are considering a potential investment in a company that appears to be a great value. The company is expected to earn $9.50 per share at the end of this year. The required rate of return for this stock is 8 percent.
a) Considering the above information, what is the appropriate price per share for the stock if the company pays out all earnings as dividends?
b) Consider the above information. If the company were to pay out half (50%) of its earnings as dividends and re-invest the remainder in the company to growth its business and earn a return on equity (ROE) of 10 percent, what is the price (value) per share under this new policy?
c) Considering the above information, what is the present value of growth opportunities (PVGO) per share for this company?
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