Question: Two-stage DCF model Company Qs current return on equity (ROE) is 13%. It pays out 45 percent of earnings as cash dividends (payout ratio =

Two-stage DCF model

Company Qs current return on equity (ROE) is 13%. It pays out 45 percent of earnings as cash dividends (payout ratio = 0.45). Current book value per share is $63. 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 11.0% and the payout ratio increases to 0.75. The cost of equity is 11.0%.

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

I got #1 correct:

Year	EPS	DIV
1	8.78	3.95
2	9.40	4.23
3	10.08	4.54
4	10.80	4.86
5	11.09	8.32

But I cannot get the correct answer for #2 Please help.

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