Rand Co.\'s current rate of return (ROE) is 14%. It pays out(payout ratio) half
ID: 2699191 • Letter: R
Question
Rand Co.'s current rate of return (ROE) is 14%. It pays out(payout ratio) half of its earnings as dividends. Current book value is $50 per share. Book value per share will grow as Rand reinvests earnings.
Assume ROE and payout ratio stay the same for the next 4 years. After that competition forces ROE down to 11.5% and payout increases to .8. The cost of capital is 11.5%
a. What are Rand's EPS and dividends next year? How will EPS and dividends grow in years 2, 3, 4, and 5 in subsequent years?
b. What is Rand's stock worth per share? How does that value depend on the payout ratio and growth rate after year 4?
Explanation / Answer
a) ParticularYear 1 2 3 4 5 Earning per share $ 7.49 $ 8.01 $ 8.58 $ 9.18 $ 9.39 Dividend per share $ 3.75 $ 4.01 $ 4.29 $ 4.59 $ 7.51 Earning growth rate 7% 7% 7% 7% 2.30% Dividend growth rate 7% 7% 7% 7% 64% b) Stock Worth per share $ 53.50 $ 57.25 $ 61.25 $ 65.54 $ 81.66
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