Blank Corp has an ROE of 6 and plowback ratio of 25 The mark

Blank Corp. has an ROE of 6% and plowback ratio of 25%. The market capitalization rate is 12%.

If the coming year\'s earnings are expected to be $1 per share, at what price will the stock sell?

What price do you expect MF shares to sell for in three years?

Solution

ROE = 6%
Plowback Ratio = 25%
Growth = ROE * Plowback ratio = 6% * 25% = 1.5%
Present Value of Earnings = Earning Next year(1 - plough back ratio) /( Return on Equity - Growth) = 1(1-25%)/( 6% - 1.5%) = 0.75/4.5% = 16.67
Price Per share in 3 years = Earnings *( 1- Plough Back ratio) * ( 1+ Growth)³/(Return on Equity - Growth) =  1(1-25%) *( 1+ 1.5%)³/( 6% - 1.5%) = 17.43


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