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Sisters Corp expects to earn $6 per share next year. The firm’s ROE is 15% and...

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?

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Answer #1

Sustainable growth rate, g = ROE * Plowback Ratio

g = 15% * 60% = 9.00%

Dividend per share expected = Earnings per share expected * (1 - Plowback ratio) = $6 * (1 - 60%) = $2.40

a)

b) When growth rate g = 0

c) PV of growth opportunities = $240 - $24 = $216

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