Question

The stock price of Nozama Inc. cannot be found online. According to forecasts, it will pay dividends that grow constantly. Similar stocks expect returns of 27.10%. According to Barren Wuffet, the stock will pay 20% of its next EPS; which are projected at $2.50 on a Net Income of $25,000,000. The Common Stock balance is $105,600,740.

1. What is the projected amount of Nozama Inc’s ROE?
2. What is Nozama Inc’s Constant Growth Rate?
3. What is the Plowback Ratio of Nozama Inc.?
4. What is the max price you should be willing to pay for the Nozama Inc. stock?

Please provide full calculations, preferably in Excel.

Answer 1

a. projected amount of Nozama Inc’s ROE=Net Income of $25,000,000/Common Stock balance is $105,600,740.

ROE=23.67%

c. What is the Plowback Ratio of Nozama Inc.?

the firm is paying a 20% dividend, hence it is retaining 80%

Plowback ratio is 80% or 0.8

b. Nozama Inc’s Constant Growth Rate=ROE*plowback ratio =23.67%*0.8=18.94%

the growth rate is 18.64%

d. max price you should be willing to pay for the Nozama Inc. stock=expected dividend/(Growth expected return)

2.5*20%/(27.1%-18.94%)

$6.13