1). g1 = ROE * (1 - Payout Ratio) = 0.1 * (1 - 0.73) = 0.027
gC = ROE * (1 - Payout Ratio) = 0.04 * (1 - 0.79) = 0.0084
D1 = D0 * (1 + g1) = $4.2 * (1 + 0.027) = $4.3134
D2 = D1 * (1 + g1) = $4.3134 * (1 + 0.027) = $4.4299
D3 = D2 * (1 + g1) = $4.4299 * (1 + 0.027) = $4.5495
D4 = D3 * (1 + g1) = $4.5495 * (1 + 0.027) = $4.6723
D5 = D4 * (1 + gc) = $4.6723 * (1 + 0.0084) = $4.7116
P4 = D5 / [r - gC]
= $4.7116 / [0.13 - 0.0084] = $4.7116 / 0.1216 = $38.75
P0 = [D1 / (1 + r)] + [D2 / (1 + r)2] + [D3 / (1 + r)3] + [(D4 + P4) / (1 + r)4]
= [$4.3134 / (1 + 0.13)] + [$4.4299 / (1 + 0.13)2] + [$4.5495 / (1 + 0.13)3] + [($4.6723 + $38.75) / (1 + 0.13)4]
= $3.82 + $3.47 + $3.15 + $26.63 = $37.07
2). Sustainable growth rate (g) = ROE * plow-back ratio
= 0.14 * 0.49 = 0.0686, or 6.86%
Dividend payable at year 1; D1 = EPS*(1+g) *(1-plowback ratio)
= $7.5*(1 + 0.0686)*(1 - 0.49)
= $4.087
Stock price P0 = D1/(k-g)
= $4.087/(0.12 - 0.0686)
= $4.087 / 0.0514 = $79.52
EPS in year 1 = EPS0 * (1 + g)
= $7.5 * (1 + 0.0686) = $8.0145
So, PVGO = P0 - [E1 / k]
= $79.52 - ($8.0145/0.12)
= $79.52 - $66.79
= $12.73
Doolittle Co.just paid a dividend of $4.2 this year (to). Doolittle is expected to pay 0.73...
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