The table below gives a firm’s EPS estimates and retention ratios for years 1 th
ID: 2673479 • Letter: T
Question
The table below gives a firm’s EPS estimates and retention ratios for years 1 through 5. The growth in EPS from year 4 to year 5 and the retention ratio in year 5 will persist forever. The firm’s cost of equity is 15%.time 0 1 2 3 4 5
retention rate 100% 100% 80% 25% 25%
EPS $2.00 $2.60 $3.38 $4.19 $4.51
What is the fair market value of the stock today?
a. $28.00 b. $32.20 c. $37.00 d. $42.00
What return on investment does the firm expect on retained earnings?
a. 20.00% b. 25.00% c. 30.00% d. 35.00%
Explanation / Answer
b c
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