Company Q’s current return on equity (ROE) is 16%. The firm pays out 60 percent of its earnings as cash dividends. (payout ratio = .60). Current book value per share is $62. Book value per share will grow as Q reinvests earnings.
Assume that the ROE and payout ratio stay constant for the next four years. After that, competition forces ROE down to 12.5% and the payout ratio increases to .80. The cost of capital is 12.5%.
a. What are Q’s EPS and dividends in years 1, 2, 3, 4, and 5? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
b. What is Q’s stock worth per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
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