Question

MF Corp. has an ROE of 16% and a plowback ratio of 50%. If the coming year's earnings are expected to be $2 per share, at what price will the stock sell? The market capitalization rate is 12%. (Do not round intermediate calculations.) Price $ b. What price do you expect MF shares to sell for in three years? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

$31.49 per share

Step-by-step explanation:

The price of the shares after 3 years according to the Dividend Valuation formula would be:

Future Value after three years = Po * (1 + g)^3

And here,

Po = Do * (1 + g) / (k - g)

So this means that the the above equation becomes:

Future Value after three years = E1 * (1 - b) / (k - g) * (1 + g)^3

Here

E1 is the earnings per share $2

b is 50%

k is the shareholder's rate of return, which is 12%

g = Plowback ratio * ROE = 50% * 16% = 8%

Now by putting values, we have:

Future Value after three years = $2 * (1 - 50%) / (12% - 8%) * (1 + 8%)^3

= $31.49 per share