Question

**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 $

Answer #1

**Part a.** In order to calculate the value of
share using constant growth dividend discount model, we first need
to calculate the growth rate of dividends.

Sustainable Growth rate = ROE * Retention Ratio = 15% * 50% = 7.5%

D_{1} = EPS * (1 - Retention rate) = $7 * 50% =
$3.50

According to Constant growth dividend discount model,

**Value of Share
= $3.50/(10% - 7.5%) = $140**--> Answer top option
a

Part b & c. Value of share = Price of share with no growth + PV of growth opportunities.

**Price of Share
without growth = D _{1}/r = $3.50/10% = $35**
--> Answer top option b

=> **Present
Value of Growth Opportunities = Value of Share - Price of Share
without growth = $140 - $35 = $105** --> Answer
top option c

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 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.)

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?

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.

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...

Hewlett-Packard’s (HP) expected dividends for the coming year
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Using the constant-growth dividend discount method, calculate
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Calculate the present value of growth opportunities for HP. (10
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Suppose you found a positive PVGO for HP. In this case, should
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16) Firm TUV expects to earn $6 per share next year. In the next
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ABC Corporation expects to pay a dividend of $2 per share next
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opportunities.

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