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a company's stock price is $42, it pays out all earnings as dividends, so the simple...

a company's stock price is $42, it pays out all earnings as dividends, so the simple dividend discount model is appropriate. assume the discount factor the market applies to the company's expected dividend is 8%. If ROE is 16%, what is the book value per share? Answer is 21. Please show all work how to get to the answer.

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Answer #1

Required rate = Dividend/Current price

8%*42= Dividend

3.36=Dividend

The dividend will be equal to earnings per share as the company pays out all earnings as a dividend,

As ROE=Net income/Shareholders equity, or EPS*No of shares/BVPS* No of shares or,

ROE=EPS/Book value per share

16%=3.36/BVPS

BVPS=21

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