ENTER EVERY PART OF INFORMATION ON THE TABLE Company Q’s current return on equit
ID: 2714816 • Letter: E
Question
ENTER EVERY PART OF INFORMATION ON THE TABLE
Company Q’s current return on equity (ROE) is 12%. It pays out earnings as cash dividends using a payout ratio of 0.40. Current book value per share is $59. Book value per share will grow as Q reinvests earnings.
Assume that the ROE and payout ratio stay constant for the next four years. After that, competition forces ROE down to 10.5% and the payout ratio increases to 0.75. The cost of capital is 10.5%.
What are Q’s EPS and dividends in years 1, 2, 3, 4, and 5? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
What is Q’s stock worth per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
ENTER EVERY PART OF INFORMATION ON THE TABLE
Company Q’s current return on equity (ROE) is 12%. It pays out earnings as cash dividends using a payout ratio of 0.40. Current book value per share is $59. Book value per share will grow as Q reinvests earnings.
Assume that the ROE and payout ratio stay constant for the next four years. After that, competition forces ROE down to 10.5% and the payout ratio increases to 0.75. The cost of capital is 10.5%.
Explanation / Answer
(a) Particulars calculation Amount($) Dividend Retention Current Book value per share 59 Return on equity 0.12 Earning per share of year 1 59*0.12 7.08 Payout ratio 0.4 Payout 2.832 Retention 4.248 Book Value at year 2 59(1+0.04248) 61.50632 Eps of year 2 7.380744 7.3807584 2.95230336 4.428455 Book Value at year 3 61.50632(1+0.04428455) 64.2301 Eps of year 3 64.201*0.12 7.707612 3.08304479 4.624567 Book Value at year 4 64.201 * (1+0.04624567) 67.170018 Eps of year 4 8.0604022 6.04530164 2.015101 Book Value at year 5 67.170018*(1+0.02015101) 68.523562 Eps of year 5 68.52562*0.105 7.194974 (b) The Q Stock worth per share is 68.5235
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