Assume that the opportunity cost of capital is 12%
Class 3 (Chapter 4)Year1234Book equity (beginning of year)10.00Earnings per share, EPSReturn on equity, ROE.25.25.16.16Payout ratio.20.20.50.50Dividends per shareGrowth rate of dividends-Class 3 (Chapter 4)Complete the table above.Assume that the opportunity cost of capital is 12%. Calculate the value of the company’s stock (assume that after year 4 the company grows at a constant rate, i.e. the growth rate stays constant at year 4 level).What part of that value reflects the discounted value of P3, the price forecasted for year 3?What part of P3 reflects the present value of growth opportunities (PVGO) after year 3?Suppose that competition will catch up with the company by year 4, so that it can earn only its cost of capital on any investments made in year 4 or subsequently. What is the stock worth now under this assumption? (Make additional assumptions if necessary).
