Question: You are now valuing the Southwest Bank, a small bank that is growing rapidly. The bank reported earnings per share of $2 in the just-completed

You are now valuing the Southwest Bank, a small bank that is growing rapidly.

The bank reported earnings per share of $2 in the just-completed financial year and paid out dividends per share of $0.20. The book value of equity at the beginning of the year was $14. The beta for the stock is 1.10, the risk-free rate is 6% and the risk premium is 4%.

a. Assuming that it will maintain its current return on equity and payout ratio for the next five years, estimate the expected growth rate in earnings per share.

b. Assuming that the firm will start growing at a constant rate of 5% a year beyond that point in time, estimate the value per share today. (You can assume that the return on equity will drop to 12% in stable growth and that the beta will become 1.)