Answer and Explanation:
The computation is shown below:
a) For ROE of the company
As we know that
Debt ratio = 1 - (1 ÷ Equity multiplier)
0.4 = 1 - (1 ÷ Equity multiplier)
(1 ÷ Equity multiplier) = 0.6
Equity multiplier = 1 ÷ 0.6
= 1.6667
Now ROE is
ROE = Net Profit Margin × Total Asset Turnover × Equity multiplier
= 10% × 0.9 × 1.6667
= 15%
b) For the Price of FSL shares
Expected Dividend next year (D1) = Projected EPS × Dividend payout ratio
= $3.50 × 30%
= $1.05
And, Required Return(ke) = 12.4%
Growth Rate(g) = ROE × (1 - Dividend payout ratio)
= 15% × (1 - 0.30)
= 10.5%
And finally the Price of STock:-
= D1 ÷ (ke - g)
= $1.05 ÷ (0.124 - 0.105)
= $55.26
C. For Present Value of Growth Opportunity(PVGO)
As we know that
Present Value of Growth Opportunity(PVGO) = Stock Price - (EPS ÷ Ke)
= $55.26 - ($3.50 ÷ 12.4%)
= $27.03
