BVPSCurrent = $95. ROEEarly = 16% for next 5 yrs ROELate = 4% after 5 yrs (in perpetuity) Expected...

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BVPS_Current = $95.
ROE_Early = 16% for next 5 yrs
ROELate = 4% after 5yrs (in perpetuity)
Expected ROE (discount rate) = 5.1 %
Above numbers are independent from plow backs/ policybelow.
Dividend Policy:
Plow back = 90% of earnings in early period.
Plow back = 20% of earnings in late period
Question: What is the price of your stocktoday?

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4.5 Ratings (837 Votes)


	g=Growth Rate =ROE*Plow back
	Growth Rate Early=0.9*16%=	14.4%
	g1=Growth Rate early	14.4%
	g2=growth rate in late period=0.2*4%	0.80%

D0	Current Dividend =(1-0.9)16%95	$1.52
D1=D0*(1+g1)	Dividend in year1	$1.74	(1.52*1.144)
D2=D1*(1+g1)	Dividend in year2	$1.99	(1.74*1.144)
D3=D2*(1+g1)	Dividend in year3	$2.28	(1.99*1.144)
D4=D3*(1+g1)	Dividend in year4	$2.60	(2.28*1.144)
D5=D4*(1+g1)	Dividend in year5	$2.98	(2.60*1.144)
D6=D5*(1+g2)	Dividend in year6	$3.04	(2.98*1.08)
	Price in year 5=P5=D6/(R-g2)
	R=Discount Rate=5.1%=0.051
	P5=3.04/(0.051-0.008)=	$70.65
	Present Value (PV) of Cash Flow:
	(Cash Flow)/((1+i)^N)
	i=Discount Rate=5.1%=0.051
	N=Year of Cash Flow
	N	A	B=A/(1.051^N)
	Year	Cash flow	PV of cash flow
D1	1	$1.74	1.654500476
D2	2	$1.99	1.800902516
D3	3	$2.28	1.960259256
D4	4	$2.60	2.133717021
D5	5	$2.98	2.32252357
P5	5	$70.65	55.09241957
		SUM	$64.96

	PRICE OF THE STOCK =Present Value of Future Cash Flows
	PRICE OF THE STOCK TODAY	$64.96

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BVPSCurrent = $95.ROEEarly = 16% for next 5 yrsROELate = 4% after 5yrs (in perpetuity)Expected ROE (discount rate) = 5.1 %Above numbers are independent from plow backs/ policybelow. Dividend Policy:Plow back = 90% of earnings in early period. Plow back = 20% of earnings in late periodQuestion: What is the price of your stocktoday?