Question

2. Sigma Oy's 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 company increases the payout ratio to 60%. The company does not plan to issue or buyback shares. The cost of capital is 9.5%. • What is per-share value of Sigma Oy

Answer 1

A B C D E F G H I ROE Retention ratio Growth 16% 75% 12.00% After four years ROE Retention ratio Growht 10 10.00% 40% 4% 11 12 13 3 14 15 Year EPS Payout ratio DPS PV 1 5.60 25% 1.40 1.28 2. 6.27 25% 1.57 1.31 7.02 25% 1.76 4 7.87 25% 1.97 1.37 5 8.18 60% 4.91 62.09 16 17 1.34 18 19 Share price 67.38

G ROE Retention ratio Growth 0.16 0.75 =C4*C5 After four years ROE Retention ratio Growht 0.1 0.4 =C9*C10 0 3 14 15 Year EPS Payout ratio DPS 0.6 =35*16% =D14*(1+$C$6) =E14*(1+$C$6) =F14*(1+$C$6) =G14*(1+C11) 0.25 0.25 0.25 0.25 =D14*D15 =E14*E15 =F14*F15 =G14*G15 =H14*H15 =D16/(1+9.5%)^D13 =E16/(1+9.5%)^E13 =F16/(1+9.5%)^F13 =G16/(1+9.5%)^G13 =H16/((9.5% -4%)*(1+9.5%)^4) 16 PV Share price =SUM(D17:H17) 21