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Firm has an ROE of 10 percent. Earnings per share are $2, and expected pay is...

Firm has an ROE of 10 percent. Earnings per share are $2, and expected pay is $0.50 per share annual dividend. With you requiring a 12.5 percent ROE, how much would you pay for this firm's stock?

a. $4

b. $20

c. $25

d. $10

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Answer #1

Sustainable growth rate, g = ROE * (1 - Dividend Payout Ratio)

g = ROE * (1 - Dividend/Earnings)

g = 10% * (1 - $0.50/$2) = 7.50%

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