Morrobel and Victoria grows by 500% and 400% respectively in years one and two.

ID: 2635704 • Letter: M

Question

Afterwards, it grows by an undisclosed rate forever. You know it has an ROA of 20%

and an equity multiplier of 1.5 while its dividend payout ratio is 25%. Its bheta with

cyclicality of sales and degree of operating leverage is 2.5. Its tax rate is 20% and its

debt to equity is.9/.1.What is its market price, if its dividend is $10 and its market rate

of return is 11%, while the risk free rate is 6%?

Answer

Required return(Ke)=Rf+Beta(Rm-Rf)

=6%+2.5(11-6)=18.50%

Growth rate=Retantion ratio*ROA

=(.75*.20)*100=15%

Market Pricebased on dividend=D1/(Ke-g)

=$60/(.1850-.15)

=$1714.29

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