11. MetaTrend Corp. earns a book rate of return (ROE) of 12%. It reinvests one-half...
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11. MetaTrend Corp. earns a book rate of return (ROE) of 12%. It reinvests one-half its earnings and pays out the other half as cash dividends. The nominal cost of capital is 12%.
(a) Given this ROE and dividend payout ratio, what is the growth rate of Meta-Trends earnings and dividends?
(b) Assume this growth rate is expected to continue in perpetuity. What is the present value of MetaTrend shares? Assume that book value per share is $10. (c) What does your answer to (b) assume about the timing of dividend payments? Explain briefly. (d) Your calculation in (b) assumes a nominal cost of capital and a nominal growth rate. Restate the cost of capital and growth rate in real (inflation- adjusted) terms and recompute the present value of MetaTrend shares. Show that the present value does not change. (e) Suppose MetaTrend decides to pay out all its earnings as cash dividends. Therefore it does not grow. What is the change, if any, in MetaTrends stock price? Why?
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