You are valuing the equity (stock) of the following two firms: 

Firm A:  Net income = $5,000,000.  Most recent annual dividend payment  = $3.00  Shares outstanding = 1,000,000  ROE = 14%  Expected return on stock (E[r]) = 10%

Firm B:  Earnings per share = $6  Dividends per share = $3  Shares outstanding = 1,000,000  ROE = 12%  Expected return on stock (E[r]) = 9% 

Part A (5 marks): Please compute the price of Firm A's stock. Hint: start by computing the sustainable growth rate. 

Part B (5 marks): Please compute the price of Firm B's stock. Hint: start by computing the sustainable growth rate. 

Part C (5 marks): Based on your analysis, which stock has better growth opportunities? Defend your answer.

Answer rating: 100% (QA)

Firm Valuation Part A Firm A Sustainable Growth Rate SGR SGR ROE Retention ratio Retention ratio 1 D... View the full answer