Question

eBook Problem 8-02 The Clipper Sailboat Company is expected to earn $4 per share next year. The company will have a return on equity of 15 percent and the company will grow 5 percent in the future. The company has a cost of equity of 12 percent. Given that information, answer the following questions a. What is the value of the company's stock? Do not round intermediate calculations. Round your answer to the nearest cent. b. What is the present value of the growth opportunity? Do not round intermediate calculations, Round your answer to the nearest do not round intermediate actions. Round your answer to percent. What would the appropriate P/E multiple be for this to C. Assume that the growth rate is only two decimal places Continue without saving MacBook Pro

Answer 1

a)
Growth rate=ROE * (1 - payout ratio)
5% = 15% * (1 - payout ratio)
1 - payout ratio = 5% / 15% = 0.33
Payout ratio = 1 - 0.33 = 0.67

Dividend = EPS * payout ratio
= $4 * 0.67
= $2.67

Stock Price = Dividend in 1 year/(cost of equity - growth rate)
= $2.67 / (0.12 - 0.05)
= $2.67 / 0.07
= $38.10

Value of company's stock = $38.10

b)
PVGO = Stock Price - (E1 / Cost of Equity)
= $38.10 - ($4 / 0.12)
= $38.10 - $33.33
= $4.76

PVGO = $4.76

c)
Growth rate=ROE*(1-payout ratio)
3% = 15% * (1 - Payout ratio)
Payout ratio = 1 - (3% / 15%) = 1 - 0.2 = 0.8

Dividend = $4 * 0.8 = $3.2

Price = Dividend in 1 year/(cost of equity - growth rate)
= $3.2 / (0.12 - 0.03)
= $3.2 / 0.09
= $35.56

P/E = $35.56 / $4 = 8.89

P/E = 8.89

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