a) MF Corp

Finance Apr 19, 2021

a) MF Corp. has an ROE of 10% and a plowback ratio of 50%. If the coming year's earnings are expected to be $2 per share, at what price will the stock sell? The market capitalization rate is 15%. (Round your answer to 2 decimal places. Do not round intermediate calculations.)

b) What price do you expect MF shares to sell for in three years? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Expert Solution

a) Computation of the stock price (P0):-

Growth rate = ROE * Retention ratio

= 10% * (1 - 50%)

= 5%

Price = Dividend next year / (Required return - Growth rate)

= $2 * 50% / (15% - 5%)

= $1 / 10%

= $10

b) Computation of the stock price in three years:-

Stock price in three years (P3) = P0 * (1 + Growth rate)^n

= $10 * (1 + 5%)^3

= $10 * 1.1576

= $11.58

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