Question: What is Q's stock worth per share?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter7: Common Stock: Characteristics, Valuation, And Issuance
Section: Chapter Questions
Problem 17P
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Company Q's current return on equity (ROE) is 20%. It pays out 45 percent of earnings as cash
dividends (payout ratio 0.45). Current book value per share is $56. Book value per share will grow
as Q reinvests earnings.
Assume that the ROE and payout ratio stay constant for the next two years. After that,
competition forces ROE down to 10.0% and the payout ratio increases to 0.80. The cost of capital
is 11.0%.
Question: What is Q's stock worth per share?
O 106.1
O 121.7
O 111.6
118.2
O 74.9
Transcribed Image Text:Company Q's current return on equity (ROE) is 20%. It pays out 45 percent of earnings as cash dividends (payout ratio 0.45). Current book value per share is $56. Book value per share will grow as Q reinvests earnings. Assume that the ROE and payout ratio stay constant for the next two years. After that, competition forces ROE down to 10.0% and the payout ratio increases to 0.80. The cost of capital is 11.0%. Question: What is Q's stock worth per share? O 106.1 O 121.7 O 111.6 118.2 O 74.9
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