MF Corp. has an ROE of 16% and a plowback ratio of 50%. If the coming year\'s ea
ID: 2714133 • Letter: M
Question
MF Corp. has an ROE of 16% and a plowback ratio of 50%. If the coming year's earnings are expected to be $3 per share, at what price will the stock sell? The market capitalization rate is 11%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
What price do you expect MF shares to sell for in three years? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
MF Corp. has an ROE of 16% and a plowback ratio of 50%. If the coming year's earnings are expected to be $3 per share, at what price will the stock sell? The market capitalization rate is 11%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Explanation / Answer
a) Growth(g) = ROE × plowback ratio(b) = 0.16× 0.50 = 0.08 = 8.0%
D1 = $3(1 – b) = $3(1 – 0.50) = $1.50
Po= D1/k-g = 1.5/0.11-0.08 =$50
stock is selling at $50
b) divident paid in next three years
D1=3
D2=D1(1+g) =3(1+0.08)=3.24
D3 =D2(1+g) 3.24(1+0.08)=3.499
on this basis price after three years are
price for 3 years P= D3/K-G=3.499/0.11-0.08= $116.63
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