Question

3. Hewlett-Packard's (HP) expected earnings per share are $0.80. The required rate of return for HP is 15%. HP's ROE is 18% and plowback ratio is 25%. A. Using the constant-growth dividend discount method, calculate the firm's intrinsic value. (10 points) B. Calculate the present value of growth opportunities for HP. (10 points) C. Suppose you found a positive PVGO for HP. In this case, should the firm continue with its current dividend policy or should it instead pay out 100% of earnings as dividends? (5 points)

please include all work

please include all work

Answer 1

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@ v 1x ENG 02:37 25-03-2020 29 | X HU634 X HU fx HV HT HW HX HY HZ 1A 1B i D Formula Bar 616 617 618 619 620 621 PAYOUT = b = ROE = 75% 25% 18% 622 g=b X ROE 4.50% [25% X 18%] PO = D1/(ke - g) 626 627 628 D1 = EPS1 X (1-b) = 0.80 X 75% = 0.6 629 PO = 0.6/(0.15-0.045) = 5.71 630 631 PVGO = PVGO = PO - (EPS/ke) 5.71 - (0.8/0.15) = 0.38 637 638 639 640 KE CAPM UTILITY, SHARPE, beta coNvexity DGM beta port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLOQ DIR right clean YIELD bc ... ►

@ v 1x ENG 02:37 25-03-2020 29 | X HU657 HT 633 X HU fx HV HW HH HH HH IA IB ic o IE IF a 634 PAYOUT = b = 80% (SUPPOSED 20% 635 636 g= b X ROE 3.60% [20% X 18%] PO = D1/(ke - g) D1 = EPS1 X (1-b) = 0.8 X 80% = 0.64 PO = 0.64/(0.15-0.036) = 5.61 PVGO = PVGO = PO - (EPS/ke) 5.61 - (0.8/0.15) = 0.28 647 648 ROE > ke, so as "g" has decreased from 4.5% to 3.6%, the value of PVGO also declined from 0.38 to 0.28 when ROE > ke, firm should pay less dividend CONTINUE WITH CURRENT DIVIDEND POLICY 652 654 655 656 657 KE CAPM UTILITY, SHARPE, beta coNvexity DGM beta port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLOQ DIR right clean YIELD bc ... ►