Company ABC's earnings per share this year are $5. ABC's earnings are expected to grow at...

Company ABC's earnings per share this year are $5. ABC's earnings are expected to grow at rate g every year. The return that investors expect on ABC is 10%. ABC's current (ex-dividend) stock price is $80. ABC's payout ratio is 0.4.

(a) Determine rate g.

(b) Determine the present value of ABC's growth opportunities.

Expert Solution

Given in the question:

EPS= $5

Stock Price= $80

Payout Ratio= 40%

Cost of Capital= 10%

ROE = EPS/MPS= 5/80= 6.25%

g= reinvestment rate * roe

reinvestment rate = 1- payout ratio= 1- 0.4= 0.6

Therefore, g=0.6*6.25%= 3.75%

b. PV of Growth Opportunities= Dividend Amount/(cost of equity-g)= 32/(10%-3.75%)= 512

jeff jeffy answered 2 years ago

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