Question

Company Q’s current return on equity (ROE) is 13%. The firm pays out 45 percent of its earnings as cash dividends. (payout ratio = .45). Current book value per share is $53. Book value per share will grow as Q reinvests earnings.Assume that the ROE and payout ratio stay constant for the next four years. After that, competition forces ROE down to 11.0% and the payout ratio increases to .70. The cost of capital is 11.0%.This is for Part B I am not sure of my Answer. B) What is Q’s stock worth per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)Stock worth per share $Puranjay0106 answersPlowback ratio = 1 –payout ratio = 1.0 –0.45 = 0.55Dividend growth rate = g= Plowback ratio × ROE = 0.55 × 0.13 = 0.0715ROE = EPS0/Book equity per shareEPS0 = 0.13*53 = $6.89DIV0= payout ratio × EPS0= 0.55× $ = $3.50after 4 year g = Plowback ratio × ROE = (1 –0.7) × 0.11 = 0.033Year EPS DIVIDENDS1 6.89*1.0715=7.38 7.38*0.45= 3.3212 6.89*1.07152=7.91 3.553 6.89*1.07153=8.47 3.8114 6.89*1.07154=9.08 4.0865 6.89*1.033*1.07154=9.38 9.38*0.7= 6.56

Answer 1

Answer:

The answer for question is explained below.

Explanation:

106 answers

Plow back  ratio  =  1  – payout  ratio  =  1.0 –0.45  = 0.55

Dividend  growth  rate  =  g =  Plow back  ratio  ×  ROE  =  0.55  ×  0.13  = 0.0715

ROE  =  EPS0 / Book  equity  per  share  

EPS0  =  0.13 * 53  =  $6.89

DIV0= payout ratio × EPS0= 0.55× $ = $3.50

after  4 year g  =  Plow back  ratio  ×  ROE  =  (1 –0.7)  ×  0.11  =  0.033

See attachment for table.