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Unformatted text preview: P=116.667 1. Our company has to decide between (1) pay a $5.00 dividend next year, which represents 100% of its earnings This will provide investors with a 12% expected return. D/r 5/.12%= 41.667 (2) plow back 40% of the earnings at the firm’s current return on equity of 10%. What is the value of the stock before and after the plowback decision? Note, this is essentially the same problem as the example shown in class, except that the return on equity is 10%, instead of 20% in class. Comparing the results of this problem with the example shown in class, how does your answer change? Can we say that reinvesting always create value for the firm? yes P= (div 1)/(r-g) div1= (eps) *( dividnet pay out ration) div1=(5) * (. .60 )=3 G= b * roe = 40 % * 10 % =.04 P=3/(12% -4%) =37.5 $ More return on equity = more money 2. Try to show the following: Under the Gordon’s Growth Model, the capital gain yield equals the growth rate of the dividends. Not sure?? P=d1/(k-g)...
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This note was uploaded on 02/13/2012 for the course MGMT 109 taught by Professor Zheng during the Spring '11 term at UC Irvine.
- Spring '11