Question

Sisters Corp expects to earn $8 per share next year. The firm’s ROE is 10% and its plowback ratio is 60%. If the firm’s market capitalization rate is 8%.

**a.** Calculate the price with the constant
dividend growth model. **(Do not round intermediate
calculations.)**

Price $ 100

**b.** Calculate the price with no growth.

Price $

**c.** What is the present value of its growth
opportunities? **(Do not round intermediate
calculations.)**

PVGO $

Answer #1

**(a)-The price with the constant
dividend growth model.**

Here, we’ve Dividend in next year (D1) = $3.20 per share [$8.00 x 40%]

Dividend Growth Rate (g) = 6.00% [10% x 0.60]

Required Rate of Return (Ke) = 8.00%

Therefore, the Price of the stock using Constant Dividend Growth Model = D1 / (Ke – g)

= $3.20 / (0.08 – 0.06)

= $3.20 / 0.02

= $160.00

**(b)-The price with no
growth.**

The price with no growth = Earnings per share in next year Required Rate of Return

= $8.00 per share / 0.08

= $100.00 per share

**(c)-The present value of its growth
opportunities** **(PVGO)**

The present value of its growth opportunities = The share price with the constant dividend growth model - The price with no growth

= $160.00 per share - $100.00 per share

= $60.00 per share

Sisters Corp. expects to earn $6 per share next year. The firm’s
ROE is 16% and its plowback ratio is 60%. If the firm’s market
capitalization rate is 10%.
a. Calculate the price with the constant dividend
growth model. (Do not round intermediate
calculations.)
b. Calculate the price with no growth.
c. What is the present value of its growth
opportunities? (Do not round intermediate
calculations.)

Sisters Corp. expects to earn $6 per share next year. The firm’s
ROE is 15% and its plowback ratio is 60%. The firm’s market
capitalization rate is 10%.
a. Calculate the price with the constant
dividend growth model.
b. Calculate the price with no growth.
c. What is the present value of its growth opportunities?

Sisters Corp expects to earn $6 per share next year. The firm’s
ROE is 15% and its plowback ratio is 60%. If the firm’s market
capitalization rate is 10%.
a. Calculate the price with the constant dividend growth
model.
b. Calculate the price with no growth.
c. What is the present value of its growth opportunities?

HMW # 2 Chapter 13
Sisters Corp expects to earn $7 per share next year. The firm’s
ROE is 15% and its plowback ratio is 50%. If the firm’s market
capitalization rate is 10%.
a. Calculate the price with the constant
dividend growth model. (Do not round intermediate
calculations.)
Price
$
b. Calculate the price with no growth.
Price
$
c. What is the present value of its growth
opportunities? (Do not round intermediate
calculations.)
PVGO
$

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