Chapter 13 HW 13.4 Problems instructions Ihelp Save & Exit | | Submit Question 2

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Chapter 13 HW 13.4 Problems instructions Ihelp Save & Exit | | Submit Question 2 (of 4) E save & Exit!! Submit 2. 2.00 points Problem 13-11 Sisters Corp expects to earn $5 per share next year. The firm's ROE is 12% and its plo back ratio s 80%. If the firms market capitalization rate is 10%. a. Calculate the price with the constant dividend growth model. (Do not round intermediate calculations.) Price S b. Calculate the price with no growth. Price c. What is the present value of its growth opportunities? (Do not round intermediate calculations.) PVGO References eBook & Resources Worksheet Problem 13-11 Learning Objective: 13-03 Assess the growth prospects of a firm, and relate growth opportunities to the P/E ratio.

Explanation / Answer

a. growth rate =g= ROE*plowback ratio = 0.12*0.8=0.096=9.6%

required rate of return =r= market capitalization rate = 10%

dividend next year = D1 = expected EPS next year*(1-plowback ratio) = 5(1-0.8) = 1

price from constant growth model = D1/(r-g) = 1/(.1-.096) = $250

b. price with no growth = D1/r = 1/0.1 = $10

c.PVGO = Value of stock with growth – value no growth = 250- 10 = $240

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