Question

V VolCal in at the end of the year is expected to have EPS of $5 the firm has a cost of capital of 19% currently pay out of all earnings as a divident using the assumption of perfect capital markets

if the firm decides to payout 60% of earnings and the firms return on investments is 15% what firm value will the company have?

a. 43.7750

b.58.8835

c.41.666

d.50.2575

e.40.0000

f.45.4545

g. 0%

h. 2%

I 1%

j. 3%

k.60.2675

Answer 1

EPS = $5

Cost of capital = 19%

Dividend payout ratio = 100% of earnings

Revised payout ratio = 60% of earnings

ROI = 15%

DIvident payout =60% of earnings

= 60%(5$)

= 3$

Earnings retained = 2$

Value of firm = 2$/5$*100

=40%