MF Corp. has an ROE of 20% and a plowback ratio of 30%. If the coming year\'s ea
ID: 2792697 • Letter: M
Question
MF Corp. has an ROE of 20% and a plowback ratio of 30%. 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 13%. (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 20% and a plowback ratio of 30%. 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 13%. (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
Answer a.
ROE = 20%
Plowback Ratio, b = 30%
Market Capitalization Rate, r = 13%
Growth rate, g = ROE * b
Growth rate, g = 20% * 0.30
Growth rate, g = 6%
Next Year EPS, EPS1 = $3
Next Year Dividend, D1 = EPS1 * (1 - b)
Next Year Dividend, D1 = $3 * (1 - 0.30)
Next Year Dividend, D1 = $2.10
Current Price. P0 = D1 / (r - g)
Current Price. P0 = $2.10 / (0.13 - 0.06)
Current Price. P0 = $2.10 / 0.07
Current Price. P0 = $30.00
Current Selling Price is $30.00
Price in 3 years, P3 = P0 * (1 + g)^3
Price in 3 years, P3 = $30.00 * 1.06^3
Price in 3 years, P3 = $35.73
Expected selling price in 3 years is $35.73
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