A firm reinvests 60% of its earnings in projects with return on equity of 10%. The...

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A firm reinvests 60% of its earnings in projects with return onequity of 10%. The market capitalization rate is 15%. If theexpected year-end dividend is $2/share and paid-out earnings of$5/share, find out the growth rate and present value of the growthopportunity.
Given:
Long-term government bondrate                                                     4%
Historical risk premium on themarket                                              7%
Beta estimate of Sylvia’sSeparates                                                0.95
Price range of Sylvia’s Separates’ shareprice                               $5 - $9
Proportion of earningsretained                                                        0.6
Average return on retainedearnings                                              12%
Proposed dividend per share nextyear                                           $0.30
Current annual interest on company’s loan frombank                6%
Taxrate                                                                                                 25%
Based on the information given above,
find out the required rate of return using CAPM
find out the growth rate and calculate the required rate ofreturn based on Gordon’s dividend growth model(DGM)
Explain the Gordon growth model as a technique for thevaluation of common stocks and discuss what kind of stocks thismodel is more appropriate for valuing.
Discuss how PE ratio can be used in equity valuation and itspitfalls.

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a growth rate retention ratio ROE 60 10 6 PVGO current share price earnings cost of equity current share price next year dividend cost of equity growth rate current share price 2 See Answer

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A firm reinvests 60% of its earnings in projects with return onequity of 10%. The market capitalization rate is 15%. If theexpected year-end dividend is $2/share and paid-out earnings of$5/share, find out the growth rate and present value of the growthopportunity. Given:Long-term government bondrate 4%Historical risk premium on themarket 7%Beta estimate of Sylvia’sSeparates 0.95Price range of Sylvia’s Separates’ shareprice $5 - $9Proportion of earningsretained 0.6Average return on retainedearnings 12%Proposed dividend per share nextyear $0.30Current annual interest on company’s loan frombank 6%Taxrate 25%Based on the information given above,find out the required rate of return using CAPM find out the growth rate and calculate the required rate ofreturn based on Gordon’s dividend growth model(DGM) Explain the Gordon growth model as a technique for thevaluation of common stocks and discuss what kind of stocks thismodel is more appropriate for valuing. Discuss how PE ratio can be used in equity valuation and itspitfalls.