a. The stock price is computed as shown below:
Growth rate is computed as follows:
= Plowback ratio x return on equity
= 0.50 x 0.18
= 0.09
Expected dividend is computed as follows:
= Expected earnings x ( 1 - plowback ratio )
= $ 2.60 x 0.50
= $ 1.30
So the stock price will be:
= Expected dividend / ( capitalization rate - growth rate )
= $ 1.30 / ( 0.12 - 0.09 )
= $ 43.33 Approximately
b. Expected price after 2 years is computed as follows:
= $ 43.33 x ( 1 + growth rate )2
= $ 43.33 x ( 1 + 0.09 )2
= $ 51.48 Approximately
Feel free to ask in case of any query relating to this question
Check my work Problem 18-9 MF Corp. has an ROE of 18% and a plowback ratio...
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Chapter 18 Saved Help Save & Exit Submit Check my work MF Corp. has an ROE of 15% and a plowback ratio of 40%. The market capitalization rate is 13%. a. If the coming year's earnings are expected to be $2.10 per share, at what price will the stock sell? (Do not round intermediate calculations. Round your answer to 2 decimal places.) points Price eBook Print References b. What price do you expect MF shares to sell for in three...
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