DIY Inc. reported earnings per share of $1.6 in 2021. The firm expects high growth...
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DIY Inc. reported earnings per share of $1.6 in 2021. The firm expects high growth for the next 7 years, with return on equity (ROE) of 32% and a payout ratio of 20%. After year 7, the firm expects a stable growth rate of 5% a year and stable ROE of 15%. The stock of DIY Inc. has a beta of 1.3, which is not expected to change over time. The 10-year Treasury bond yield is 2% and the equity risk premium is 6.5%.
a. What is the growth rate for DIY Inc. in the high-growth stage (i.e., next 7 years)?
b. What is the expected dividend payout ratio of DIY Inc. in the stable-growth stage (i.e., after year 7)?
c. Estimate DIY Inc.'s price-to-earnings (PE) ratio based on fundamentals.
d. If the current stock price of DIY Inc. is $45 per share, is the stock over, under, or correctly valued relative to its fundamentals?
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