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Kamila [148]
3 years ago
13

NCH Corporation, which markets cleaning chemicals, insecticides and other products, paid dividends of $2.00 per share in 1993 on

earnings of $4.00 per share. The book value of equity per share was $40.00, and earnings are expected to grow 6% a year in the long term. The stock has a beta of 0.85, and sells for $60 per share. (The treasury bond rate is 7%.). How much would the return on equity have to increase to justify the price/book value ratio at which NCH sells for currently?
Business
1 answer:
sashaice [31]3 years ago
4 0

Answer:

The reutrn on equity should be of 9.53%

Explanation:

We can solve the return on equity by considering the gordon model of dividend growth:

\frac{divends_1}{return_{equity}-growth} = Intrinsic \: Value

current dividends 2 dollars

next year dividends: current x (1 + g) = 2 x (1 + 0.06) = 2.12

\frac{2.12}{return_{equity}-0.06} = 60

\frac{2.12}{60} +0.06= Ke

Ke = 0.09533 = 9.53%

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Byron does not visit another store to compare other vases because he already knows the unique characteristics he is looking for which he found in the first vase that he saw and bought. So he purchased a specialty good.

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AysviL [449]

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