Final answer:
The price of Sisters Corp's stock using the constant dividend growth model is $600. The price with no growth is $24. The present value of growth opportunities (PVGO) is $576.
Step-by-step explanation:
To calculate the price of Sisters Corp's stock using the constant dividend growth model, we need to consider the earnings per share (EPS), the return on equity (ROE), the plowback ratio, and the market capitalization rate. Given an EPS of $6.00, a plowback ratio of 60%, and a market capitalization rate of 10%, we can find the growth rate of dividends, which is ROE multiplied by the plowback ratio (0.16 x 0.60 = 0.096 or 9.6%). The constant dividend growth model formula is P = D1 / (k - g), where P is the price, D1 is the expected dividend per share next year, k is the market capitalization rate, and g is the growth rate of the dividends. The expected dividend per share D1 can be calculated as (1 - plowback ratio) x EPS = (1 - 0.60) x $6.00 = $2.40. Thus, P = $2.40 / (0.10 - 0.096) = $2.40 / 0.004 = $600.
For the price with no growth, we simply divide the expected dividend per share by the market capitalization rate with no growth factor: P = D1 / k, so P = $2.40 / 0.10 = $24.
The present value of growth opportunities (PVGO) is the difference between the price with growth and the price with no growth. Therefore, PVGO = Price with growth - Price with no growth = $600 - $24 = $576.