Respuesta :
Answer:
Return on equity(r) = 0.16
Plowback ratio(b) = 50 = 0.5
Earnings per share(EPS) = $2
D1 = 50% x $2 = $1
Cost of equity(Ke) = 0.12
Growth rate(g) = b x r
= 0.5 x 0.16
= 0.08 = 8%
Current market price(Po) = D1/Po + g
= $1/0.12 - 0.08
= $25
Market price in 3 years = Po(1+g)n
= $25(1+0.08)3
= $25(1.08)3
= $31.49
Explanation:
In this case, we need to calculate growth rate by multiplying the plowback ratio by return on equity. Then, we will calculate the current market price as shown above. Thereafter, we will subject the current market price to a 3-year growth rate to calculate the market price in 3 year's time
The current share price is the cost of the future shares price in the context of the past prices, growth rate and market capitalization rate.
a. The stock will be sold at $25
b. The expected price in 3years will be $31.49
Computation:
Given,
Return on equity(r) = 0.16
Plowback ratio(b) = 50% = 0.5
Earnings per share(EPS) = $2
a. The selling price for the stock is the current price of the stock to be sold:
[tex]\text{Selling Price}=\dfrac{\text{D}_1}{\text{Market capitalization rate}}+\text{growth rate}\\\\=\dfrac{\text{EPS}\times\text{b}}{0.12}+(\text{b}\times\text{r})\\\\=\dfrac{\$2\times50\%}{0.12}+(0.5\times16\%)\\\\=\dfrac{\$1}{0.12}+8\%\\\\=\$25[/tex]
b. The expected price for the MF shares to be sold at the 3rd year is computed as follows:
[tex]\text{Expected price}=\text{Current Price}\times(1+\text{growth rate})^\text{n}\\\\=\$25\times(1+0.08)^3\\\\=\$31.49[/tex]
To know more about current share price, refer to the link:
https://brainly.com/question/20081809
