Question

A.

Growth and Value A firm has projected earnings of $6 per share for next year and has a 30% dividend payout ratio. The firm's required return is 13%. The firm's ROE is 14%. What is the intrinsic value of the stock?

$56.25

$54.33

$50.77

$49.65

B.

Value of Growth Opportunities A firm has projected annual earnings per share of $4.00 and a dividend payout ratio of 60%. The firm's required return is 11% and dividends and earnings are expected to grow at 3% per year indefinitely. For this firm the present value of its growth opportunities is ________.

$66.36

$69.65

$53.63

$12.73

Answer 1

A)		Po = D1/k-g
	EPS	$6
	Dividend = 6*0.30	1.8
	g = 0.14*(1-0.30)	0.098
		P0 = 1.80/(0.13-0.098)
		56.25
B)	EPS = $4
	Dividend payout ratio = 0.60
	Required return = 11%
	Dividends and earnings are expected to grow at 3%
	Present value of growth opportunities = ?
	Dividend = 4*0.60	2.4
		P0 = 2.4/(0.11-0.03)
		30
	P0 = EPS/required return + PVGO
	30 = 4/0.11 + PVGO
	30 - 36.36 = PVGO
	PVGO = -$6.36