Please show all work 1. You are analyzing a small firm with a total value of ear

Question

Please show all work

1. You are analyzing a small firm with a total value of earning assets equal to $50,000. You know that this firm will pay its entire earnings per share as dividends, and investors hold 1000 shares. The firm has no liabilities. You know this firm has a return to earning assets r that is the norm for its industry, equal to 10%. A. (10) Based on the Gordon dividend growth model, what is the value of each share in this firm? Assume the first dividend payment will be in exactly one year. B. (10) Given your computation briefly define and determine the price earnings ratio, the dividend yield and Tobin?s Q of this firm. C. (10) Now suppose the firm changes its policy and decides to retain 50 % of its earnings, to be reinvested in its earning assets. Assume it will earn the same rate of return on these investments as it earns on existing assets. Repeat your answer to A and B above under these assumptions.

Explanation / Answer

A(10) gordon dividend growth model D1/ke-g calculation of D1 $50000/1000 $50 ke=10% as company is not retaning any amount so growth will be zero applying value in above formula 50/0.10 P0= $500 B(10) P/E ratio= MPS/EPS EPS= $50 applying value in above formula $500/$50 P/E ratio 10% Dividend yiels=dividend per share/MPS $50/$500 10% C(10) retain 50% so dividend will be $50000-25000 $25,000 D1=25 25/0.10-0.05 calculation of growth=b*r b=50% r=10% calculated in D(10) growth=5% P0=$500 P/E ratio=10% dividend yld=10% D(10) Rm=0.06 Rf=0.02 ke=Rf + beta ( Rm-Rf) 10=2+x(6-2) beta=2 Ri=Rf+ beta(Rm-Rf) 2+2(6-2) r=10%

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