Question: Company Qs current return on equity (ROE) is 14%. It pays out 50 percent of earnings as cash dividends (payout ratio = 0.50). Current book

Company Qs current return on equity (ROE) is 14%. It pays out 50 percent of earnings as cash dividends (payout ratio = 0.50). Current book value per share is $60. Book value per share will grow as Q reinvests earnings.

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 payout ratio increases to 0.90. The cost of equity is 11.5%.

What are Qs EPS and dividends in years 1, 2, 3, 4, and 5?
What is Qs stock worth per share?

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