Company Ts current return on equity (ROE) is 16%. It pays out one-quarter of earnings as cash dividends (payout ratio = .25). Current book value per share is $35. The company has 5 million shares outstanding. Assume that ROE and payout ratio stay constant for the next four years. After that, competition forces ROE down to 10% and the company increases the payout ratio to 60%. The company does not plan to issue or retire shares The cost of capital is 9 5% What is stock T worth? How much of stock T’s value is attributable to growth opportunities?
Company Ts current return on equity (ROE) is 16%. It pays out one-quarter of earnings as cash dividends (payout ratio = .25). Current book value per share is $35. The company has 5 million shares outstanding. Assume that ROE and payout ratio stay constant for the next four years. After that, competition forces ROE down to 10% and the company increases the payout ratio to 60%. The company does not plan to issue or retire shares The cost of capital is 9 5% What is stock T worth? How much of stock T’s value is attributable to growth opportunities?
Chapter7: Common Stock: Characteristics, Valuation, And Issuance
Section: Chapter Questions
Problem 8P
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Company Ts current
Assume that ROE and payout ratio stay constant for the next four years. After that, competition forces ROE down to 10% and the company increases the payout ratio to 60%. The company does not plan to issue or retire shares The cost of capital is 9 5%
What is stock T worth?
How much of stock T’s value is attributable to growth opportunities?
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