Question

Forcefully Delicious Cookies has an ROE of 20% and a book value of equity per share...

Forcefully Delicious Cookies has an ROE of 20% and a book value of equity per share of $10.00. The firm intends to plowback 40% of its earnings and pays out the remaining portion to shareholders in an annual dividend. The opportunity cost of capital is 12%. Using the dividend discount/Gordon please tell me the answers to the below. In excel please

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Answer #1

g = ROE * Plowback ratio

g = 20% * 40%

g = 8% = 0.08

r = 12%

ROE = Earnings per share/Book value of equity per share

Earnings per share = ROE * Book value of equity per share

Earnings per share = 20% * 10

Earnings per share = $2

Dividend per sahre = Earnings per share * (1 - plowback)

Dividend per sahre = 2 * (1 - 0.40)

Dividend per sahre = $1.2

Share price = D1/(r - g)

Share price = $32.40

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