Consider a growth stock. Laramie Connection (LC) has the following data:
• Expected EPS next year is $6.50;
• Payout ratio is 40%;
• Return on equity (ROE) is 25%
• Costs of capital or discount rate, r = 20%.
A) What is the value of LC's stock? What is the value of LC's growth opportunity?
B) What happens to the value of LC's stock if the company increases the payout ratio from 40% to 60%?
C) What is the change in the value of LC's growth opportunity relative to part (A) answer? Please explain.
D) What happens to the value of LC's stock if the company increases the payout ratio from 40% to 60%, and its ROE is 10% instead of 25%? What is the change in the value of LC's growth opportunity relative to part (A) and part (B) answers? Please explain
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