\"Company F will have earnings per share of $3 this year and expect that they wi
ID: 2658090 • Letter: #
Question
"Company F will have earnings per share of $3 this year and expect that they will pay out $1.25 of these their equity cost of capital is 15%. The expected growth rate for Company F's dividends is Note: Express your answers in strictly numerical terms. For example, if the answer is 5%, enter 0.05 as an answer." QUESTION 10 10 Company F will have earnings per share of S3 this year and expect that they will pay out $1.25 of these earnings to shareholders in the form of a dividend. Company F's return on new investments is 13% and their equity cost of capital is 15%. The value of Company F's stock is Note: Express your answers in strictly numerical terms. For example, if the answer is $500, enter 500 as an answer.Explanation / Answer
Calculation of value of Stock
Market price per share under Gordown model=Do *(1+g)/(ke-g)
=>1.25*(1.0758)/(0.15-0.0758) =18.12
Conclusion:
The value of F Stock is 18.12
Notes:
1) Retention Ratio= EPS-DPS/EPS*100 ,i.e $(3-1.25/3)=58.33%
2)Growth Rate=Retention ratio*Return on investment ,i.e 58.33*13=7.58%
Abberevations:
Do= dividend payable
g=growth rate
ke= cost of equity
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