Question

uestion 7 O out of 2 points You expect Canyon Buff Corp wil have earnings per share of this year and expect that they will pay out $150 of these earnings to shareholders in the form of a dividend. Canyon Buff's x return on new investments is 15 and their equity cost of capital is 12%. The value of a share of Canyon Buff's stock is closest to Selected Answer: D. $12.50 Question 8 O out of 2 points

Answer 1

Under Dividend constant growth model, Stock value can be computed in following manner:

$P_0 = \frac{D1}{k-g}$

where,

D1 = expected dividend

k = cost of equity

g = constant growth rate

Let's first calculate the growth rate of Buff:

$g = ROE*(1-b)$

where,

ROE = return on equity

b = dividend payout ratio

here, return on new investment to be considered as ROE

Expected dividend = $1.5

Expected EPS = $3

putting he values
$g = 0.15*(1-\frac{1.5}{3})$

$g = 0.15*(1-0.5)$

$g = 0.15*0.5$

$g = 0.075$

Thus,

$P_0 = \frac{D1}{k-g}$

$P_0 = \frac{1.5}{0.12-0.075}$

$P_0 = \frac{1.5}{0.045}$

$\bg_green \large P_0 = \$33.33$

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.