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CHOCO is a new firm that has raised £150,000 (book value) by selling ordinary shares. Management...

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Finance

CHOCO is a new firm that has raised £150,000 (book value) byselling ordinary shares. Management plans to earn 20% rate ofreturn on equity (ROE), which is more than the 15% rate of returnin comparable risk investments. 50% of all the earnings will be re-invested in the firm.

a) What will be the value of dividends and the growth rate forCHOCO?

b) What will be CHOCO ratio of market value to book value?

c) How would the MV/BV ratio change if CHOCO can earn only 10%rate of return on its investments. Explain your results.

Answer & Explanation Solved by verified expert
4.3 Ratings (667 Votes)
Book value of equity 150000 ROE 20 ROE net incomebook value of equity 20 net income150000 net income 15000020 30000 1 dividend payment 50 of net income 3000050 15000 1 growth rate retention ratioROE 5020 100    See Answer
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CHOCO is a new firm that has raised £150,000 (book value) byselling ordinary shares. Management plans to earn 20% rate ofreturn on equity (ROE), which is more than the 15% rate of returnin comparable risk investments. 50% of all the earnings will be re-invested in the firm.a) What will be the value of dividends and the growth rate forCHOCO?b) What will be CHOCO ratio of market value to book value?c) How would the MV/BV ratio change if CHOCO can earn only 10%rate of return on its investments. Explain your results.

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