1.You forecast a company to have a ROE of 8%, a dividend payout ratio of 21%. Cu

Question

1.You forecast a company to have a ROE of 8%, a dividend payout ratio of 21%. Currently the company has a price of $30 and $4 earnings per share.   What is the company's PEG ratio based on market price?

2. A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 4%, and if investors require a 14% rate of return, what is the price of the stock?

3. The EBIT of a firm is $232, the tax rate is 40%, the depreciation is $52, capital expenditures are $51 and the increase in net working capital is $46. What is the free cash flow to the firm?

Explanation / Answer

1. PEG ratio = ($30 / $4) / [8% * (1 - 21%)]

= 1.19

2. Stock price = $2 * (1 + 4%) / (14% - 4%)

= $20.80

3. Free cashflow to firm = $232 * (1 - 40%) + $52 - $51 - $46

= $94.20

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