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Homework answers / question archive / a) MF Corp
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.)
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
