Consider a firm with a ROE of 25% and a plowback ratio of 20%.If the EPS a year form today is expected to be 5 and assuming a required rate of return of 12%. What should the stock of the firm be worth...
Consider a firm with a ROE of 25% and a plowback ratio of 20%.If the EPS a year form today is expected to be 5 and assuming a required rate of return of 12%. What should the stock of the firm be worth exactly four years from now
steps please
Homework Answers
| Growth rate=ROE*retention ratio |
| growth rate=25*0.2 |
| growth rate = 5 |
DPS=EPS*(1-plowback ratio) = 5*(1-0.2) = 4
| As per DDM |
| Price = Dividend in 1 year/(cost of equity - growth rate) |
| Price = 4/ (0.12 - 0.05) |
| Price = 57.14 |
Price in 4 years = current price*(1+growth rate)^2
=57.14*(1+0.05)^4=69.45
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