Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
Fleury Security Limited (FSL) is projected to have earnings per share (EPS) $3
Fleury Security Limited (FSL) is projected to have earnings per share (EPS) $3.50 next year, and the tom's dividends are 30% of earnings. Investors have a required return on FSL shares of 12.4%. The company has a profit margin of 10%, total asset turnover 0.9, and total debt ratio 0.4
a) Calculate the ROE of the company.
b) Calculate the price of FSL, shares.
c) How much of that price is due to future growth opportunities"?
Expert Solution
a). Computation of the ROE of the company:-
Debt ratio = 1- (1 / Equity multiplier)
0.4 = 1 - (1 / Equity multiplier)
(1 / Equity multiplier) = 1 - 0.4
= 0.6
Equity multiplier = 1 / 0.6
= 1.67
ROE = Net profit margin * Total asset turnover * Equity multiplier
= 10% * 0.9 * 1.67
= 15%
b). Computation of the price of FSL shares:-
D1 = EPS * 30%
= $3.50 * 30%
= $1.05
Growth rate = ROE * (1 - Dividend payout ratio)
= 15% * ( 1- 30%)
= 10.50%
Share price = D1 / (Required return - Growth rate)
= $1.05 / (12.4% - 10.50%)
= $1.05 / 1.9%
= $55.26
c). Computation of the price due to future growth opportunities:-
Present value of growth opportunity = Stock price - (Earnings / Required rate of return)
= $55.26 - ($3.50 / 12.4%)
= $55.26 - $28.23
= $27.04
Archived Solution
You have full access to this solution. To save a copy with all formatting and attachments, use the button below.
For ready-to-submit work, please order a fresh solution below.
