Consider a company with expected earnings per share next year of $60, whose ROE for the...

Transcribed Image Text:

Consider a company with expected earnings per share next year of $60, whose ROE for the next 6 years is 15%, and retains all earnings for the next 6 years. Suppose that after these 6 years, ROE falls to 5%, and beginning with year 7, the company chooses to pay out all earnings as dividends. The annual discount rate is 8%. Our goal is to value this company. (a) If the price of one share of this company in year 6 is P6, what is the price today (i.e., express Po using Po)? (b) What is the rate of earnings growth during the first six years of the company? Express Es as a function of earnings next year E₁ and ROE = 15%. Calculate E6- (c) Calculate the capital stock today (Ko) and in year 6 (K6). (Recall, Et+1 ROE - K₂) (d) Compute earnings E7, keeping in mind that ROE falls to 5% at the end of year 6. = (e) Calculate D7 using the fact that the company pays out all earnings starting year 7. Given all earnings are paid out, what is the growth rate of dividends from year 7 on? (f) Calculate P6, the price in period 6, using the Gordon growth formula (recall, you need to use dividends a period ahead in the Gordon model). (g) Calculate Po, the stock price today. Consider a company with expected earnings per share next year of $60, whose ROE for the next 6 years is 15%, and retains all earnings for the next 6 years. Suppose that after these 6 years, ROE falls to 5%, and beginning with year 7, the company chooses to pay out all earnings as dividends. The annual discount rate is 8%. Our goal is to value this company. (a) If the price of one share of this company in year 6 is P6, what is the price today (i.e., express Po using Po)? (b) What is the rate of earnings growth during the first six years of the company? Express Es as a function of earnings next year E₁ and ROE = 15%. Calculate E6- (c) Calculate the capital stock today (Ko) and in year 6 (K6). (Recall, Et+1 ROE - K₂) (d) Compute earnings E7, keeping in mind that ROE falls to 5% at the end of year 6. = (e) Calculate D7 using the fact that the company pays out all earnings starting year 7. Given all earnings are paid out, what is the growth rate of dividends from year 7 on? (f) Calculate P6, the price in period 6, using the Gordon growth formula (recall, you need to use dividends a period ahead in the Gordon model). (g) Calculate Po, the stock price today.

Answer rating: 100% (QA)

A company has expected earnings per share next year of 60 whose ROE for the next 6 years is 15 and retains all earnings for the next 6 years Suppose that after these 6 years ROE falls to 5 and beginni... View the full answer