Question: Galaxy Airs current return on equity (ROE) is 15%. It pays out 50% of earnings as cash dividends. Current book value per share is $40.

Galaxy Airs current return on equity (ROE) is 15%. It pays out 50% of earnings as cash dividends. Current book value per share is $40. Book value per share will grow as the firm reinvests earnings. Assume that the ROE and payout ratio stays constant for the next three years. After that, competition forces ROE down to 12% and the payout ratio increases to 80%. The cost of capital is 11%. (assume the firm does not pay any tax).

a. What are Galaxy Airs EPS and dividends next year? What are EPS and dividends in years 2, 3, 4, and subsequent years? (6 points)

b. What is the firms stock worth per share? (4 points)

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