A firm is expected to earn $8 per share. The pay-out ratio is 60% and it will remain same. If the ROE of the firm is 25% and required rate of return on equity is 13%, find the present value of growth opportunities.

A firm is expected to earn $8 per share. The pay-out ratio is 60% and it will remain same. If the ROE of the firm is 25% and required rate of return on equity is 13%, find the present value of growth opportunities.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section: Chapter Questions

Problem 8P

See similar textbooks

Related questions

Q: $8 per share. The pay-out ratio is 60% and it will remain same. If the ROE of the firm is 25% and…

A: Here, we need to find the price using the constant growth dividend model. Price = dividend in year…

Q: Laurel Enterprises expects this year's earnings to be $4.00 per share and has a 40% retention rate,…

A: In the given question we require to estimate firm's current stock price. We can calculate stock…

Q: (Measuring growth) Given that a firm's return on equity is 17 percent and management plans to retain…

A: Growth rate based on retention ratio and return on equity The growth rate is calculated by…

Q: ARN has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and…

A: Present value of growth opportunity is a valuation techniques which determines the price of the…

Q: BIG TECH Inc. sells at $40 per share, and its latest 12-month earnings were $8 per share, of…

Q: Calculate the value of the firm, given that the current profit is $5,000. The expected growth rate…

A: Value of firm = [ { Profit * ( 1 + Interest rate ) } / { Interest rate - Growth rate } ]…

Q: A firm is expected to earn $8 per share. The pay-out ratio is 60% and it will remain same. If the…

A: Given: Earning = $ 8 per share Pay out ratio = 60% ROE = 25%

Q: The earnings, dividends, and stock price of Shelby Inc. are expected to grow at 8% per year in the…

A: Cost of equity is the rate of return that an investor may expect from the amount which the investor…

Q: what will be the new net income?

A: Financial leverage means the degree by which a company uses fixed income securities or outside…

Q: A certain company has expected next year earnings per share of $6. If the company wants to reinvest…

A: The question is based on the concept of Stock valuation

Q: Summit Systems will pay an annual dividend of $1.59 this year. If you expect Summit's dividend to…

A: Gordon dividend growth model is used to value a stock who's dividends are expected to grwo at a…

Q: A firm has total interest charges of $10,000 per year, sates of $1 million, a tax rate of 40…

A: Times interest earned ratio or interest coverage ratio shows ability of the company in paying it's…

Q: Robi Axiata Limited has a book value of Tk 100 per share. Based on CAPM model, investors require an…

A: The value of the share is the present value of the dividends.

Q: BM expects to pay a dividend of $8 next year and expects these dividends to grow at 3.15% a year.…

A: IBM Share Price = Dividend Next Year / (Cost of Equity - Growth Rate)

Q: A firm is expected to earn $8 per share. The pay-out ratio is 60% and it will remain sam If the ROE…

A: Growth rate = (1 - payout ratio) x ROE Growth rate = (1 - 0.60) x 0.25 Growth rate = 0.40 x 0.25…

Q: Arts and Crafts, Inc. will pay a dividend of $4 per share in 1 year. It sells at $50 a share, and…

Q: A company projects a rate of return of 20% on new projects. Management plans to plow back 20% of all…

A: Since more than three parts are asked at a time, the answer for first three sub-parts is only…

Q: Your Company has an ROE on book value of 12% and a book value per share of $24 and can continue to…

A: ROE = 12% Book value per share = $ 24 Plowback ratio = 70% Cost of equity = 10%

Q: What is the value of this firm?

A: Value of Levered Firm: It is estimated by the sum of the value of the unlevered firm and the…

Q: A company has a return on equity of 32 percent and plowback ratio of 50 percent. If the earnings of…

A: The Stock price is the current price of the share that is available in the stock market.

Q: The required rate of return for Ola Industries is 15.75 percent. The stock pays a current dividend…

A: This question require us to calculate the estimated price of the stock of Ola industries. We can…

Q: Houston Tools has expected earnings before interest and taxes of $189,400, an unlevered cost of…

A: A levered firm is one which has debt and an unlevered firm is one which has no debt. We will use the…

Q: National Co. has a constant growth rate of 5%. The company pays out 70% of its earnings. National…

A: An optimal capital structure is an efficient and appropriate mix of debt and equity so that…

Q: You are told by your investment advisor that Laduma Co. is expected to earn R5 per share next year,…

A: Computation as follows: Hence, the value of share is R 47.33. The present market price of share is…

Q: If the Synyster Corp. has an ROE of 17 percent and a payout ratio of 25 percent, what is its…

A: Retention ratio = 1- Dividend payout ratio Retention ratio = 1- 25% Retention ratio = 75%

Q: What proportion of earnings is being plowed back into the firm if the sustainable growth rate is 8%…

A: Given ÷ Growth rate ÷ 8% ROE ÷ 20%

Q: A firm currently pays a dividend of $3.50, the stock price is $65 and a constant growth rate of 6…

A: Current dividend (D0) = $3.50 Stock price (P0) = $65 Growth rate (G) = 6%

Q: 20

A: Formula to calculate the price is: P0 = Div/r - g Where P0 is the price, Div is the dividend, r is…

Q: Eastern Electric currently pays a dividend of about $1.78 per share and sells for $27 a share. If…

A: We need to compute the growth rate in this question. We can solve this question using Dividend…

Q: A financial analyst estimates that the current risk-free rate for NN company is 6.25 percent, the…

A: Gordon growth model provides the current price of a share if it has a constant growth till infinity

Q: ZDL Ltd's earnings per share next year is expected to be $1.50 and the earnings are expected to grow…

A: Present value of growth opportunity (PVGO) refers to the valuation method used by the company to…

Q: Arts and crafts will pay a divided of $5 per share in 1 year. It sells at $50 a share, and firms in…

A: As per dividend discount model, Price of stock = Dividend at the end of year 1 /(expected return -…

Q: HighGrowth Company has a stock price of $18. The firm will pay a dividend next year of $1.15, and…

A: Stock price (P0) = $18 Next dividend (D1) = $1.15 Growth rate (g) = 3.5%

Q: You are told by your investment advisor that Laduma Co. is expected to earn R5 per share next year,…

A: Formulas:

Q: Company has expected earnings of $4.8 per share for next year. The firm's ROE is 16%, and its…

A: Present value of growth opportunities (PVGO) can be calculated as below:

Q: Adobe Systems has come out with a new and improved product. As a result, the firm projects an ROE…

A: Return on Equity = 22.5%Plowback Ratio = 0.50Dividend Pay-out Ratio = 1 - 0.50 = 0.50Earnings per…

Q: The future earnings, dividends, and common stock price of Core-Tech, Inc. are expected to grow 6%…

Q: You are told by your investment advisor that Ladumo Co. is expected to earn R5 per share next year,…

A: Calculation of value of the stock: Answer: Total value of stock is R47.33

Q: You are told by your investment advisor that Laduma Co. is expected to earn R5 per share next year,…

A: The ratio which denotes the percentage of earnings which should be paid as dividend is known as…

Q: Sisters Corp expects to earn $6 per share next year. The firm's ROE is 15% and its plowback ratio is…

A: In this question we require to calculate the current stock price. According to dividend discount…

Q: Present Value of Growth Opportunities (PVGO) if the investors' required rate of return is 20%?…

A: PVGO means present value of growth opportunities. It is a method of valuation applied to growing…

Q: XYZ corp expects to earn $4 per share next year and plow back 37.5% of its earnings (i.e., it…

A: Please find the answer to the above question below:

Question

A firm is expected to earn $8 per share. The pay-out ratio is 60% and it will remain same.
If the ROE of the firm is 25% and required rate of return on equity is 13%, find the present
value of growth opportunities.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

a firm is expected to earn $8 per share . the pay-out ratio is 60%and it will remain same. if the ROE of the firm is 25% and required rate of return on equity is 13% find the present value of growth
Sisters Corporation expects to earn $28 per share next year. The firm’s ROE is 10% and its plowback ratio is 40%. Assume the firm’s market capitalization rate is 10%. What is the present value of its growth opportunities?
You are given the following information about a firm. The growth rate equals 8 percent; return of the assets (ROA) is 10 percent; the debt ration is 20 percent; and the stock is selling at $36. What is the return on equity (ROE)?
Company has expected earnings of $4.8 per share for next year. The firm's ROE is 16%, and its earnings retention ratio is 55%. If the firm's market capitalization rate is 12%, what is the present value of its growth opportunities?
A firm wishes to maintain an sustainable growth rate of 12 percent and a dividend payout ratio of 50 percent. The ratio of total assets to sales is constant at 1, and the profit margin is 8.6 percent. If the firm also wishes to maintain a constant debt-equity ratio, what must it be?
You are given the following information about a firm: Cost of equity is 10% Cash flow to equity in the prior year is $4 million Cash flow to equity in the prior year is projected to grow 11% in the current year and then at a constant 5% annual rate thereafter. What is the value of equity of the firm?
Arts and crafts will pay a divided of $5 per share in 1 year. It sells at $50 a share, and firms in the same industry provide an expected rate of return of 15%. What must be the expected growth rate of the company's dividends?
Your firm has an ROE of 12.1%, a payout ratio of 21%, $581,200 of stockholders' equity, and $366,400 of debt. If you grow at your sustainable growth rate this year, how much additional debt will you need to issue? The sustainable growth rate is %. (Round to three decimal place.)
An all-equity financed firm has a degree of operating leverage of 3, the sales of $250,000, the operating income of $50,000, and the net income of $40,000. If the sales drops to $220,000, what will be the new net income?
ARN has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of .20. Its earnings this year will be $3 per share. Investors expect a 9% rate of return on the stock.What is the present value of growth opportunities for ARN? Round your answer to two decimal places.
Your firm has an ROE of 12.1%, a payout ratio of 27%, $594,200 of stockholders' equity, and $386,100 of debt. If you grow at your sustainable growth rate this year, how much additional debt will you need to issue?