Answer:
1. The dividend per share in year 2 would be $2.16.
The dividend per share in year 3 would be $2.3328
2. The market value of the firm is $50 million
3. The value of the firm next year after the payout is $ 54
Step-by-step explanation:
1. In order to calculate the dividend per share in year 2 and the dividend per share in year 3 we would have to make the following calculation:
dividend per share in year 2=dividend per share in year 1*(1+Growth Rate)
dividend per share in year 1=$2
Growth Rate=Retention Ratio * ROE
Growth Rate=40% * 20%
Growth Rate=8%
Therefore, dividend per share in year 2=$2*(1+8%)
dividend per share in year 2=$2.16
dividend per share in year 3=dividend per share in year 2*(1+Growth Rate)
dividend per share in year 3=$2.16(1´8%)
dividend per share in year 3=$2.3328
2. In order to calculate the current market value of the firm we would have to make the following calculation:
market value of the firm=Currect Share Price * Number of outstanding shares
According to the given data:
Currect Share Price=$50
Number of outstanding shares=1 million shares
market value of the firm=$50*1 million shares
market value of the firm=$50 million
3. In order to calculate the value of the firm next year after the payout we would have to calculate first the rate of return as follows:
value of the firm =dividend per share in year 1/rate of return-growth rate
$50* Rate of Return - 4 = $2
Rate of Return = 6 / 50
Rate of Return =12%
Therefore, value of the firm next year after the payout=dividend per share in year 2/rate of return-growth rate
value of the firm next year after the payout=$2.16/0.12-0.08
value of the firm next year after the payout=$ 54