Question

The Clipper Sailboat Company is expected to earn $4 per share next year. The company will have a return on equity of 17 percent and the company will grow 5 percent in the future. The company has a cost of equity of 15 percent. Given that information, answer the following questions.

1. What is the value of the company's stock? Do not round intermediate calculations. Round your answer to the nearest cent.

   $  

2. What is the present value of the growth opportunity? Do not round intermediate calculations. Round your answer to the nearest cent.

   $  

3. Assume that the growth rate is only 4 percent. What would the appropriate P/E multiple be for this stock? Do not round intermediate calculations. Round your answer to two decimal places.

      ×

Answer 1

a. The value is computed as follows:

= (Earnings per share x dividend payout ratio) / (cost of equity - growth rate)

growth rate = roe x (1 - dividend payout ratio)

0.05 = 0.17 x (1 - dividend payout ratio)

dividend payout ratio = 0.705882353

So, the value will be as follows:

= ($ 4 x 0.705882353) / (0.15 - 0.05)

= $ 28.24

b. PVGO will be as follows:

= value computed in part a - EPS next year / cost of equity

= $ 28.24 - $ 4 / 0.15

= $ 1.57

c. PE is computed as follows:

value of the stock will be:

= ($ 4 x 0.705882353) / (0.15 - 0.04)

= $ 25.67

So, the PE will be:

= $ 25.67 / $ 4

= 6.42

Feel free to ask in case of any query relating to this question