payout ratio- 55). Current book value per share is $51 Book Company Q\'s current

Question

payout ratio- 55). Current book value per share is $51 Book Company Q's current return on equity ROE) is 15%. The firm pays out 55 percent of its earnings as cash dividends 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 12.0% and the payout ratio increases to .75. The cost of capital is 12.0%. a. 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.) Year EPS Dividends 4 b. What is Q's stock worth per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Stock worth per share

Explanation / Answer

Q's stock price=4.2075/1.12+4.49150625/1.12^2+4.794682922/1.12^3+5.118324019/1.12^4+5.960520971/1.12^5+(5.960520971*(1+12%*(1-0.75))/(12%-(12%*(1-0.75))))/1.12^5=56.09194

year Beginning Book Value EPS Dividends Ending Book Value 1 51 7.65 4.2075 54.4425 2 54.4425 8.166375 4.49150625 58.11736875 3 58.11736875 8.717605313 4.794682922 62.04029114 4 62.04029114 9.306043671 5.118324019 66.22801079 5 66.22801079 7.947361295 5.960520971 68.21485112

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