Question

# Sisters Corp expects to earn \$8 per share next year. The firm’s ROE is 10% and...

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            \$

(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

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