Question

Sisters Corp expects to earn $5 per share next year. The firm's ROE is 14% and its plowback ratio is 60%. If the firm's market capitalization rate is 10%. a. Calculate the price with the constant dividend growth model. (Do not round intermediate calculations.) Price $ ____? b. Calculate the price with no growth. Price $ _____? c. What is the present value of its growth opportunities? (Do not round intermediate calculations.) PVGO $ ______?

Answer 1

To calculate the price using the constant dividend growth model, we can use the formula: Price = Dividend / (Market Capitalization Rate - Dividend Growth Rate). Given the expected dividend per share, market capitalization rate, ROE, and plowback ratio, we can calculate the price per share.

Step-by-step explanation:

To calculate the price using the constant dividend growth model, we can use the formula:

Price = Dividend / (Market Capitalization Rate - Dividend Growth Rate)

Given that the expected dividend per share is $5 and the market capitalization rate is 10%, we can calculate the dividend growth rate using the ROE and plowback ratio. The plowback ratio is the portion of earnings retained by the company to finance growth. It is calculated as (1 - Dividend Payout Ratio). The dividend payout ratio is the portion of earnings paid out as dividends, which is the complement of the plowback ratio.

Using the formula for the dividend growth rate:

Dividend Growth Rate = ROE * Plowback Ratio

Given that the ROE is 14% and the plowback ratio is 60%, the dividend growth rate is:

Dividend Growth Rate = 14% * 60% = 8.4%

Now we can calculate the price:

Price = $5 / (10% - 8.4%) = $5 / 1.6% = $312.50 per share

Answer 2

idk that I'm not in high school