Question

firm x projects an roe of 14% and it will maintain a pplowback ratio of .45 its earnings this year will be 3.60 per share investors expect 11% rate of retrun on the stock what price do you expect form x shares to sell for in 2 years

Answer 1

$47.61 per share

Step-by-step explanation:

As we know that:

Current Price = Expected Dividend / (Required Return - Growth Rate)

Here

Expected Dividend is $1.98 (Step1)

Required Return is 11%

Growth Rate is 6.3%

By putting values, we have:

Current Price = $1.98 / (0.11 - 0.063)

Current Price = $42.13

The price of Stock in 2 years will be adjusted by growth rate:

Price of Stock in 2 years = Current Price * (1 + Growth Rate)^2

Here

Current Price of the stock is $42.13 per share

Growth rate = ROE * Plowback Ratio = 14% * 0.45 = 6.30%

By putting values, we have:

Price of Stock in 2 years = $42.13 * 1.063^2

Price of Stock in 2 years = $47.61 per share

So, you should expect the share to sell at $47.61 in 2 years

Step 1: Find Expected Dividend

Expected Dividend = Expected Earnings * Payout Ratio

Here

Expected Earnings is $3.6 per share

Payout Ratio = 1 - Plowback Ratio = 1 - 0.45 = 55%

By putting values in the above equation, we have:

Expected Dividend = $3.60 * 55%

Expected Dividend = $1.98 per Share