Question

1. What is the growth rate of a firm whose net income last year was $10 million and whose total equity value was $200 million. This firm had earnings per share of $5 and paid out in dividends $2 per share.
2. Using the same information as in the previous question (net income last year was $10 million, the total equity value was $200 million, and the firm had earnings per share of $5 per share). What is the current price per share?

Answer 1

(A)

Return on investment or Equity = Net profit/ Value of Equity

=$10,000,000/200,000,000

=0.05

EPS = $5

Dividend per share = $2

Retention ratio formula = (EPS - DPS)/EPS

(5-2)/5

= 0.6 or 60%

Growth rate formula = ROE *Retention ratio

= 0.05*0.6

=0.03 or 3%

(b)

Net income or total earnings = $10,000,000

EPS = $5

EPS formula = Total earnings/ no. Of shares

5 = 10,000,000/no. Of shares

No. Of shares = 2,000,000

Total equity value = $200,000,000

Price per share = Total equity/no. Of shares

= 200,000,000/2,000,000

=$100

So, price per share is $100