Question

Sisters Corp. expects to earn $6 per share next year. The firm’s
ROE is 16% and its plowback ratio is 60%. If the firm’s market
capitalization rate is 10%.

**a.** Calculate the price with the constant dividend
growth model. **(Do not round intermediate
calculations.)**

**b.** Calculate the price with no growth.

**c.** What is the present value of its growth
opportunities? **(Do not round intermediate
calculations.)**

Answer #1

(a) Calculation of share price with constant dividend growth model -

Dividend of next year= Earning per share of next year*(1-plowback ratio)

= $6*(1-.60)

= $2.40

Dividend growth rate= plowback ratio* return on equity

=60℅*16℅

= 9.6℅

Share price= Dividend next year/Cost of equity- growth

= $2.40/10℅-9.6℅

= $ 600

(b) Calculation of share price with no growth -

Since share price is without growth, All earning will be distributed as dividend

= Dividend next year/cost of equity

= $6/10℅

= $ 60

(C) Calculation of present value of growth opportunity

= Share price with growth - Share price without growth

= $ 600 - $ 60

= $ 540

Sisters Corp expects to earn $8 per share next year. The firm’s
ROE is 10% and its plowback ratio is 60%. If the firm’s market
capitalization rate is 8%.
a. Calculate the price with the constant
dividend growth model. (Do not round intermediate
calculations.)
Price
$
100
b. Calculate the price with no growth.
Price
$
c. What is the present value of its growth
opportunities? (Do not round intermediate
calculations.)
PVGO
$

Sisters Corp. expects to earn $6 per share next year. The firm’s
ROE is 15% and its plowback ratio is 60%. The firm’s market
capitalization rate is 10%.
a. Calculate the price with the constant
dividend growth model.
b. Calculate the price with no growth.
c. What is the present value of its growth opportunities?

Sisters Corp expects to earn $6 per share next year. The firm’s
ROE is 15% and its plowback ratio is 60%. If the firm’s market
capitalization rate is 10%.
a. Calculate the price with the constant dividend growth
model.
b. Calculate the price with no growth.
c. What is the present value of its growth opportunities?

HMW # 2 Chapter 13
Sisters Corp expects to earn $7 per share next year. The firm’s
ROE is 15% and its plowback ratio is 50%. If the firm’s market
capitalization rate is 10%.
a. Calculate the price with the constant
dividend growth model. (Do not round intermediate
calculations.)
Price
$
b. Calculate the price with no growth.
Price
$
c. What is the present value of its growth
opportunities? (Do not round intermediate
calculations.)
PVGO
$

Brothers Corp expects to earn $6 per share next year. The firm’s
ROE is 15% and its plowback ratio is 50%. If the firm’s market
capitalization rate is 13%, what is the present value of its growth
opportunities?

Hosmer Enterprises expects to earn $4 per share next year. The
firm’s ROE is 10% and its’ plowback ratio is 60%. If the firm’s
market capitalization rate is 8%:
Calculate the price if Hosmer Enterprises pays all of its earnings
out as a dividend.

16) Firm TUV expects to earn $6 per share next year. In the next
three years, the firm’s ROE is expected to be 12%, 15%, 18%,
respectively, and its dividend payout ratio is 90%. After that, the
firm's ROE is expected to increase to 25%, and the firm will set
the dividend payout ratio = 60%. Assume that the discount rate is
20%. Find the stock price

Company ABC expects to pay a dividend per share of $10 next
year, which represents 100% of its earning. The expected return
from investors is 10%. The company's return on equity is 12%.
a) Calculate the price of a share assuming that the company pays
out 100% of its earning in dividend.
b) Calculate the price of a share if the company decides to
plowback 80% of its earning into the firm's operations and
investments.
c) Assuming a plowback ratio...

MF Corp. has an ROE of 18% and a plowback ratio of 50%. The
market capitalization rate is 12%.
a. If the coming year’s earnings are expected
to be $2.60 per share, at what price will the stock sell?
(Do not round intermediate calculations. Round your answer
to 2 decimal places.)
b. What price do you expect MF shares to sell
for in two years? (Do not round intermediate calculations.
Round your answer to 2 decimal places.)

Firm reinvests 60% of its earnings in projects with ROE of 10%,
the capitalization rate is 15%. Earnings of $5/share. The expected
year-end dividend is $2/share
Calculate its price us constant dividend growth model
Calculate the present value of growth opportunity

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