Web Cites Research projects a rate of return of 20% (ROE) on new projects. Manag
ID: 2700357 • Letter: W
Question
Web Cites Research projects a rate of return of 20% (ROE) on new projects. Management plans to plow back 30% of all earnings into the firm. Earnings at the end of this year will be $2 per share, and investors expect a 10% rate of return on stocks facing the same risks as Web Cites. What is the stock price after the plowback decision?
Web Cites Research projects a rate of return of 20% (ROE) on new projects. Management plans to plow back 30% of all earnings into the firm. Earnings at the end of this year will be $2 per share, and investors expect a 10% rate of return on stocks facing the same risks as Web Cites. What is PVGO?
Waterworks has a dividend yield of 9%. If its dividend is expected to grow at a constant rate of 6%, what must be the expected rate of return on the company%u2019s stock?
Horse and Buggy Inc. is in a declining industry. Sales, earnings, and dividends are all shrinking at a rate of 6% per year (g= - 6%). If r = 10% and DIV1 = $4, what is the current value of a share?
Horse and Buggy Inc. is in a declining industry. Sales, earnings, and dividends are all shrinking at a rate of 6% per year (g= - 6%). If r = 10% and DIV1 = $4, what price do you forecast for the stock next year?
A proposed nuclear power plant will cost $2.3 billion to build (today) and then will produce cash flows of $310 million a year for 15 years (year 1 to year 15). It then must be decommissioned at a cost of $910 million (in year 15). What is project NPV if the discount rates are 4%?
Explanation / Answer
Dividend Growth
= Plowback Ratio * ROE
= 30%*20%= 6%
Required Return from Stock
= 10%
Share Price
= Coming Dividend/(Required Return - Dividend growth)
= (2*70%) /(10% - 6%)
= $35
PVGO
= Price - (earnings / Required Return)
= 35 - (2 / 10%)
= 15
Expected Rature of Return
= Dividend Growth + Dividend Yield
= 6% + 9%
15%
Share price of Horse and Buggy
= DIV1/ (r-g)
= 4 / [10% - (-6%)]
= 4 / 16%
= 25
Share price of Horse and Buggy for next year
= (DIV1*0.94) / (r-g)
= (4 * 94) / [10% - (-
= 23.5
PV
= -2,300+ (310/1.04) [ (1 - 1.04^ -15) / (1- 1.04 ^ -1) ] - 910/ (1.04)^15
= 641.41 million
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