Company T's current return on equity (ROE) is 18%
Question # 00679976
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Updated on: 05/02/2018 12:30 PM Due on: 05/02/2018
Company T's current return on equity (ROE) is 18%. It pays out one-fifth of earnings as cash dividends (payout ratio = .20). Current book value per share is $35. The company has 8 million shares outstanding.
Assume that ROE and payout ratio stay constant for the next four years. After that, competition forces ROE down to 11% and the company increases the payout ratio to 50%. The company does not plan to issue or retire shares. The cost of capital is 8.5%.
a. What is stock T worth?
b. How much of stock T's value is attributable to growth opportunities (PVGO)?
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Rating:
/5
Solution: Company T's current return on equity (ROE) is 18%