EXAMPLES CH.5 STOCK VALUATION/PVGO 1. Company ABC expects next year dividend to be $10.00 per share, and that dividend will grow at an annual rate of 5 percent indefinitely. The company plows back a constant 20 percent of its earnings in its business. Its market capitalization rate is 14 percent. (a) What is ABC’s expected earnings per share next year (EPS1)? (b) What is the company’s return on equity (ROE)? (c) What is the firm’s PVGO? 2. XYZ Corp.’s existing assets generate EPS of $5.00. If the firm reinvests just to maintain its currents assets, EPS is expected to remain constant at $5.00 a year. Starting next year, however, the firm has the opportunity to invest $3.00 per share per year for five (5) years in a new solar energy system. Each yearly investment is expected to bring a 20 percent return permanently. The required rate of return on XYZ’ stock is 12 percent. (a) What is the price of XYZ’ stock if the company decides not to undertake the project? (b) What is the price of the stock if the company decides to complete the new system?
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This note was uploaded on 04/24/2008 for the course FIN 359 taught by Professor Dialo during the Winter '08 term at Eastern Michigan University.