Question

# HMW # 2 Chapter 13 Sisters Corp expects to earn \$7 per share next year. The...

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            \$

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%

D1 = 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 = D1/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

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