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Mrac [35]
3 years ago
12

The FI Corporation’s dividends per share are expected to grow indefinitely by 5% per year. a. If this year’s year-end dividend i

s $8 and the market capitalization rate is 10% per year, what must the current stock price be according to the DDM? b. If the expected earnings per share are $12, what is the implied value of the ROE on future investment opportunities? c. How much is the market paying per share for growth opportunities (i.e., for an ROE on future investments that exceeds the market capitalization rate)?
Business
1 answer:
Andreyy893 years ago
6 0

Answer:

a)

P₀ = Div₁ / (Re - g)

  • P₀ = current stock price = ?
  • Div₁ = next dividend = $8
  • Re = equity cost = 10%
  • g = constant growth rate = 5%

P₀ = $8 / (10% - 5%) = $8 / 5% = $160

b)

EPS = $12

Return on equity (ROE) = g / b

b = retention rate = 1 - payout ratio = 1 - ($8/$12) = 0.333

g = 5%

ROE = 5% / 0.333 = 15%

c)

Present value of growth opportunity (PVGO) = P₀ - EPS/Re

  • P₀ = $160
  • EPS = $12
  • Re = 10%

PVGO = $160 - $12/10% = $160 - $120 = $40 per share

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Answer:

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Net Sales                                            2,264,640

Cost of goods sold                              1,041,600

Gross profit                                         1,223,040

Rent revenue                                          23,040

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Explanation:

a) Data and Calculations:

December 31, 2017:

Common stock 240,000

Retained earnings 513,600

Inventory 64,320

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Advertising expense  52,800

Sales discounts 8,160

Insurance expense 14,400

Interest expense 67,200

Income tax expense 67,200

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