Question

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Company «Rho», during the last fiscal year, had book value per share €100, earnings per share...

Company «Rho», during the last fiscal year, had book value per share €100, earnings per share €10 and distributed €2 dividends per share. For the next 3 years the firm is expected to have a stable payout ratio and stable return on equity. From the 3rd year and onwards the firm is expected to distribute 50% of its earnings and to have a return on equity of 5%. The beta coefficient of the firm is 1.5, the return of the market 9% and the risk free rate 6%, answer questions

a)What is the cost of equity?What is the retention ratio in the high growth period?

b)What is the return on equity in the high growth period?What is the growth rate in the stable growth period?

c)What are the dividends in the first 3 years?

Solutions

Expert Solution

a. COST OF EQUITY- 10.5%

RETENTION RATIO -80%

b. ROE- 10%

g -2.5%

c.D1 - 2.16

D2 - 2.3328

D3- 2.5194

jeff jeffy answered 1 year ago
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