Question

Consider a growth stock. Laramie Connection (LC) has the following data: • Expected EPS next year...

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

Homework Answers

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Low Tech Chip Company is expected to have EPS of $2.50 in the coming year. The...
Low Tech Chip Company is expected to have EPS of $2.50 in the coming year. The expected ROE is 14%. An appropriate required return on the stock is 11%. If the firm has a dividend payout ratio of 40%, the intrinsic value of the stock should be: $22.73. $27.50. $38.46. $28.57.
A. Growth and Value A firm has projected earnings of $6 per share for next year...
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...
5.5 Firm X is priced at $10 per share. Expected dividend next year is $1 per...
5.5 Firm X is priced at $10 per share. Expected dividend next year is $1 per share, and the expected stock price next year is $11. Therefore, stock is expected to earn (11 + 1 – 10)/10 = 20%. This implies that the company has required rate of return that is also 20%. (True / False) 5.6 When ROE < k, increasing _______ should increase the intrinsic value of equity.               a. Retention ratio               b. Dividend payout               c....
Suppose today you are considering whether to buy Stock Theta, and you want to do some...
Suppose today you are considering whether to buy Stock Theta, and you want to do some basic analysis before buying the shares. By reading the firm’s most recent Balance Sheet, you find the following information: Net Income is $5,000,000, Total Shareholders’ Equity is $25,000,000, Total Assets is $40,000,000. From other publicly available sources, you further obtain the following information: the most recent earnings per share (EPS) is $3, the dividend payout ratio is 60%, and the firm’s beta is 1.4....
An analyst uses the constant growth model to evaluate a company with the following data for...
An analyst uses the constant growth model to evaluate a company with the following data for a company: Leverage ratio (asset/equity): 1.8 Total asset turnover: 1.5 Current ratio: 1.8 Net profit margin: 8% Dividend payout ratio: 40% Earnings per share in the past year: $0.85 The required rate on equity: 15% Based on an analysis, the growth rate of the company will drop by 25 percent per year in the next two years and then keep it afterward. Assume that...
Suppose today you are considering whether to buy Stock Theta, and you want to do some...
Suppose today you are considering whether to buy Stock Theta, and you want to do some basic analysis before buying the shares. By reading the firm’s most recent Balance Sheet, you find the following information: Net Income is $5,000,000, Total Shareholders’ Equity is $25,000,000, Total Assets is $40,000,000. From other publicly available sources, you further obtain the following information: the most recent earnings per share (EPS) is $3, the dividend payout ratio is 60%, and the firm’s beta is 1.4....
An analyst uses the constant growth model to evaluate a company with the following data: Leverage...
An analyst uses the constant growth model to evaluate a company with the following data: Leverage ratio (asset/equity): 1.5 Total asset turnover: 1.6 Current ratio: 1.8 Net profit margin: 6% Dividend payout ratio: 35% Earnings per share in the past year: $0.9 The required rate on equity: 14% Based on an analysis, the growth rate of the company will drop by 25 percent per year in the next two years and then remain unchanged afterward. Assume that the company will...
An investor in Amman, Jordan, estimates that next year’s sales for Amman Intercontinental Hotels, Inc. would...
An investor in Amman, Jordan, estimates that next year’s sales for Amman Intercontinental Hotels, Inc. would amount to about 150 million Jordanian dinar. The company has 10 million shares outstanding, generates a net profit margin of about 15%, and has a payout ratio of 40%. All figures are expected to hold for next year. Given this information, compute the following. A. Estimated net earnings for next year b. Next year’s dividends per share c. The expected price of the stock...
1.Which of the following combinations can explain the logical inconsistency in the CAPM? A. Passive portfolio...
1.Which of the following combinations can explain the logical inconsistency in the CAPM? A. Passive portfolio strategy and the efficiency of the market portfolio B. Active portfolio strategy and the minimum variance of the portfolio C. Passive portfolio strategy and the capital allocation line D. Active portfolio strategy and the investment opportunity set 2.Firms with higher expected growth rates tend to have P/E ratio that are…….the P/E ratio of firms with lower expected growth rates A. Higher than B. Equal...
use the following information to answer the questions. The made up company name is ABC. Price:...
use the following information to answer the questions. The made up company name is ABC. Price: $20 R: 12% G: 4% D0: 1.10 P/E: 16 EPS: 1.25 Analyst E growth: 7% Now answer the following below using the above information that’s provided: ·      Part A-Fundamental Valuation: 1.    Estimate a growth rate for your firm's Dividends per Share. 2.    Assume a 12.5% discount rate. 3.    Calculate an estimated value of a share of the stock using the constant-growth model (Eq. 8-6...