Save & Exit Subr value: 15.00 polnts The FI Corporation\'s dividends per share a

Question

Save & Exit Subr value: 15.00 polnts The FI Corporation's dividends per share are expected to grow indefinitely by 6% per year a. If this year's year-end dividend is $10 and the market capitalization rate is 10% per year, what must the current stock price be according to the DDM? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Current stock price s b. If the expected earnings per share are $16, what is the implied value of the ROE on future investment opportunities? (Do not round intermediate calculations. Round your answer 2 decimal places.) Value of ROB c. How much is the market paying per share for growth op s (that is, for an ROE on future investments that exceeds the market captalization rate)? (Do not round intermediate calculations Round your answer to 2 decimal places.) Amount per share References eBook & Resources Worksheet

Explanation / Answer

Ans. A P0 = D1 / (k - g) 10 / (0.10 - 0.06) * 10 10 / 0.4 * 10 250 Ans. B Dividend payout ratio = 10 / 16 = 5 / 8 Plow back ratio ( b ) = 1 - (5 /8) = 3 / 8 Expected grow (g) = Plow back ratio (b) ROE (with g) = plow back ratio 6%    =   3 / 8 ROE = 16%               [cross multiplied (8 * 6 / 3)] Ans. C We assumed that ROE = k Price     =      E1 / k 16 / 0.10 160 Thus, the market price is paying $90 per share [250 - 160] for growth opportunities.

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