Growth opportunities. The firm XYZ has projected earnings per share (EPS) for the next three years...
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Growth opportunities. The firm XYZ has projected earnings per share (EPS) for the next three years as listed in the following table. The firm plan to payout a fraction of EPS as dividend, with the payout ratio listed in the table. Starting from year 4, the firm will maintain a constant payout ratio of 80%. Suppose the firm XYZ's return on equity is 15% starting year 4, and the required rate of return is 10%. Year EPS/$ Payout ratio Dividend 1 2.1 20% ? 2 3 3.5 5.0 40% ? 4 ? 60% 80% ? 1 > 4 Grow at g = ?% Constant 80% ? Grow at g = ?% (a) What are the expected dividend payments in the first three years? (b) What is the expected EPS and expected dividend in year 4? (c) What is the growth rate of expected dividend after year 4? (d) What is your estimation of current stock price using DDM? (e) Now suppose firm XYZ will pay out all the EPS as dividends starting year 4. This means after year 3 the firm's EPS will not grow but stay at $5.0. What is firm XYZ's stock price in this case? What is the present value of growth opportunity (PVGO)? Growth opportunities. The firm XYZ has projected earnings per share (EPS) for the next three years as listed in the following table. The firm plan to payout a fraction of EPS as dividend, with the payout ratio listed in the table. Starting from year 4, the firm will maintain a constant payout ratio of 80%. Suppose the firm XYZ's return on equity is 15% starting year 4, and the required rate of return is 10%. Year EPS/$ Payout ratio Dividend 1 2.1 20% ? 2 3 3.5 5.0 40% ? 4 ? 60% 80% ? 1 > 4 Grow at g = ?% Constant 80% ? Grow at g = ?% (a) What are the expected dividend payments in the first three years? (b) What is the expected EPS and expected dividend in year 4? (c) What is the growth rate of expected dividend after year 4? (d) What is your estimation of current stock price using DDM? (e) Now suppose firm XYZ will pay out all the EPS as dividends starting year 4. This means after year 3 the firm's EPS will not grow but stay at $5.0. What is firm XYZ's stock price in this case? What is the present value of growth opportunity (PVGO)?
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Related Book For
Principles Of Managerial Finance
ISBN: 978-0136119463
13th Edition
Authors: Lawrence J. Gitman, Chad J. Zutter
Posted Date:
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