Please use the following information for questions 58 Stock

Please use the following information for questions 5-8 Stock A pays an earnings of $5 per share in year 1 . The return on equity is 20%. The discount rate is 10% 5. If there is no plow-back, what is the stock price now (PO) ? A) $40 a pie

Solution

As per rules I will answer the first 4 subparts of the question

5:growth rate (g) = Plowback*ROE

=0*20% = 0

Stock price= D1/(R-g)

=$5/ (10%-0)

=$50

6: Dividend = D1= EPS*(1-Plowback)

==$5*(1-40%)

=$3

7: growth rate (g) = Plowback*ROE

=40%*20% = 8%

Stock price= D1/(R-g)

=$3/ (10%-8%)

=$150

8:EPS is the same irrespective of plowback which is $5.

Answer= $5