You believe the Gordon (constant) growth model is appropriate to value the stock of Reliable Electric Corp.
Question:
You believe the Gordon (constant) growth model is appropriate to value the stock of Reliable Electric Corp. The company had an EPS of $ 2 in 2008. The retention ratio is 0.60. The company is expected to earn an ROE of 14 percent on its investments and the required rate of return is 11 percent. Assume that all dividends are paid at the end of the year.
A. Calculate the company’s sustainable growth rate.
B. Estimate the value of the company’s stock at the beginning of 2009.
C. Calculate the present value of growth opportunities.
D. Determine the fraction of the company’s value which comes from its growth opportunities.
Step by Step Answer:
A With b 060 the dividend payout ratio is 1 b 1 060 040 Sustainable gr...View the full answer
Equity Asset Valuation
ISBN: 978-0470571439
2nd Edition
Authors: Jerald E. Pinto, Elaine Henry, Thomas R. Robinson, John D. Stowe, Abby Cohen
