a. MF Corp. has an ROE of 15% and a plowback ratio of 60%. If the coming year\'s

Question

a. MF Corp. has an ROE of 15% and a plowback ratio of 60%. If the coming year's earnings are expected to be $4 per share, at what price will the stock sell? The market capitalization rate is 13%. (Round your answer to 2 decimal places. Do not round intermediate calculations.

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.)

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.)

Explanation / Answer

expected Div = Exp EPS x ((1-plow-back ratio) = 4 x (1-0.6) = 1.6

            Growth rate = (plow-back ratio) x (ROE) = 0.6 x 0.15 = 0.09

            Using the dividend growth model:   P = ExpDiv/(r-g) = 1.6/(0.13-0.09) = $40

r= capitalisation rate

p= market price of share

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