Question: Suppose we have a company that earned $12 per share last year on $100 dollars per share of capital (all equity), which just covered its cost of capital. Now, imagine that, due to a new product, the company is expected to produce an annual return on equity (ROE) of 14% indefinitely and that the company has a policy of paying out 30% of its earnings in dividends.
24) What growth rate in earnings and dividends would you expect this business to exhibit?
A14%
B9.8%
C4.2%
D16%
25) What earnings per share figure do you expect for the upcoming year?
A$10
B$11.40
C$13.18
D$12.50
26) What per share dividend would you expect to receive for the upcoming year?
A$4.00
B$3.00
C$3.42
D$3.95
27) What should be the price per share of this business today?
A$179.55
B$155.45
C$161.78
D$198.16
28) If the share price were actually $165, would you recommend buying the shares?
ANo. The stock price is too high relative to its intrinsic value.
BNo. The stock price is too high and should thus be sold short.
CYes. The stock price is below intrinsic value.
DYes. The stock price is above intrinsic value.
29) What is this companyAc€?cs Present Value of Growth Opportunities (PVGO)?
A$100
B$55.45
C-$61.78
D$79.55
30) On the basis of the firmAc€?cs PVGO, at what price-to-earnings (P/E) ratio should these shares trade?
A13.64
B14.37
C13.62
D15.21
31) If a firm earns a return on equity (ROE) of 15% and its required return is also 15%, at what price-to-book (P/B) ratio should its stock trade?
A2.0
B1.5
C1.0
D Cannot be determined.