4. 2.00 points Problem 13-19 a MF Corp. has an ROE of 15% and a plowback ratio o

Question

4. 2.00 points Problem 13-19 a MF Corp. has an ROE of 15% and a plowback ratio of 60%. Ifthe coming years earnings are expected to be $4 per share, at what price will the stock sell? The market capitalization rate is 13%. Round your answer to 2 decimal places. Do not round intermediate calculations.) Price b. What price do you expect MF shares to sell for in three years? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Price eBook & Resources Learning Objective: 13-02 Calculate the intrinsic value of a firm using either a constant growth or multistage dividend discount model. Worksheet Problem 13-19

Explanation / Answer

a)

g = ROE X b

Give,

g = 15%

b = 0.6

15 x 0.6 = 9%

Further,

D1 = 4 x (1 – 0.5) = 1

P0 = [D1 / (k-g)]

Putting the value of D1 = 2

k = 0.13

= [1/(0.13 – 0.09)]

= 1/0.04

= $25    ……..Answer (a)

b)

Using the fact that price appreciates at the rate of g.

Hence, share price in 3 years,

P3 = P0 x (1 + 0.09)3

= 25 x (1 + 0.09)3

= $32.38 …..Answer (b)

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