Question

A Share say Y, has Earnings Per Share of 24 and PV of Growth Opportunities of R60.66.

Market Capitalisation rate is 15.45%, and a plowback ratio of 55%.

What will be the Return on Equity for Share

Answer 1

P= E/r + PVGO

Where P= Price per share, E= EPS (given as 24), PVGO= PV of growth opportunities (given as R60.66) and r= Rate of return.

Market capitalization rate is the expected rate of return on investment. Hence r, in this case, is given as 15.45%.

Plugging these values, Price P= 24/0.1545 + 60.66 = 155.34+60.66= R216

Also,

P = E*(1-b)/(r-ROE*b) Where b= plough back ratio (given as 55%) and ROE= Return on equity.

P*(r-ROE*b) = E*(1-b)

ROE*b = r- E*(1-b)/P

ROE= [r- E*(1-b)/P]/b

Plugging the values,

ROE= [0.1545-24*(1-0.55)/216]/0.55

= 0.1545-0.05/0.55 = 0.0635909 Or, 6.3591%