Question

If the Plowback ratio for Ester Company is 25%, and the project ROE = 40%, then...

If the Plowback ratio for Ester Company is 25%, and the project ROE = 40%, then the sustainable growth rate is _______. Next, Assume next years EPS = $1.00. What is the PVGO for this stock, assuming r= 12%?

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Answer #1

Answer a.

Plowback Ratio, b = 25%
ROE = 40%

Sustainable Growth Rate, g = ROE * b
Sustainable Growth Rate, g = 40.00% * 0.25
Sustainable Growth Rate, g = 10.00%

Answer b.

Next Year EPS, EPS1 = $1.00

Payout Ratio = 1 - Plowback Ratio
Payout Ratio = 1 - 0.25
Payout Ratio = 0.75

Next Year Dividend, D1 = EPS1 * Payout Ratio
Next Year Dividend, D1 = $1.00 * 0.75
Next Year Dividend, D1 = $0.75

Required Return, r = 12.00%

Stock Price with Growth = D1 / (r - g)
Stock Price with Growth = $0.75 / (0.12 - 0.10)
Stock Price with Growth = $0.75 / 0.02
Stock Price with Growth = $37.50

Stock Price without Growth = EPS1 / r
Stock Price without Growth = $1.00 / 0.12
Stock Price without Growth = $8.33

PVGO = Stock Price with Growth - Stock Price without Growth
PVGO = $37.50 - $8.33
PVGO = $29.17

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