Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 4, Problem 20PS
Two-stage DCF model Company Q’s current
- a. What are Q’s EPS and dividends next year? How will EPS and dividends grow in years 2, 3, 4, 5, and subsequent years?
- b. What is Q’s stock worth per share? How does that value depend on the payout ratio and growth rate after year 4?
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Question: What is Q's stock worth per share?
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Company Q's current return on equity (ROE) is 14%. It pays out 50 percent of earnings as cash dividends (payout ratio = 0.50). Current
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Assume that the ROE and payout ratio stay constant for the next four years. After that, competition forces ROE down to 11.5% and the
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a. What are Q's EPS and dividends in years 1, 2, 3, 4, and 5? (Do not round intermediate calculations. Round your answers to 2
decimal places.)
Year
1
2
3
4
5
EPS
Dividends
b. What is Q's stock worth per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Stock worth per share
Company Q’s current return on equity (ROE) is 16%. It pays out 60 percent of earnings as cash dividends (payout ratio = 0.60).
Current book value per share is $62. Book value per share will grow as Q reinvests earnings.
Assume that the ROE and payout ratio stay constant for the next three years. After that, competition forces ROE down to 12.5% and the payout ratio increases to 0.70.
The cost of capital is 11%.
What is Q’s stock worth per share?
Multiple Choice
$103.9
$91.7
$98.4
$85.6
Chapter 4 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 4 - True/false True or false? a. All stocks in an...Ch. 4 - Dividend discount model Respond briefly to the...Ch. 4 - Dividend discount model Company X is expected to...Ch. 4 - Dividend discount model Company Y does not plow...Ch. 4 - Constant-growth DCF model Company Zs earnings and...Ch. 4 - Dividend discount model Company Z-prime is like Z...Ch. 4 - Dividend discount model If company Z (see Problem...Ch. 4 - Prob. 8PSCh. 4 - Prob. 9PSCh. 4 - Free cash flow Under what conditions does r, a...
Ch. 4 - Prob. 11PSCh. 4 - Prob. 12PSCh. 4 - Horizon value Suppose the horizon date is set at a...Ch. 4 - Stock quotes Go to finance.yahoo.com and get...Ch. 4 - Two-stage DCF model Consider the following three...Ch. 4 - Constant-growth DCF model Pharmecology just paid...Ch. 4 - Two-stage DCF model Company Qs current return on...Ch. 4 - Cost of equity capital Each of the following...Ch. 4 - Growth opportunities Alpha Corps earnings and...Ch. 4 - Prob. 23PSCh. 4 - Two-stage DCF model Compost Science Inc. (CSI) is...Ch. 4 - DCF and free cash flow Permian Partners (PP)...Ch. 4 - DCF and free cash flow Construct a new version of...Ch. 4 - Valuing a business Mexican Motors market cap is...Ch. 4 - Valuing Tree cash flow Phoenix Corp. faltered in...Ch. 4 - Constant-growth DCF formula The constant-growth...Ch. 4 - DCF valuation Portfolio managers are frequently...Ch. 4 - Valuing a business Construct a new version of...
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