1 A company has a book value of equity of $244 million, an expected ROCE of 15% and a cost of equity capital of 14.8%.

Question

1 A company has a book value of equity of $244 million, an expected ROCE of 15% and a cost of equity capital of 14.8%. What is the company's market value of equity if its dividend payout ratio is 80% and its long-run growth rate in residual earnings is 3% p.a.? 2 A company's book value per share is $6.49. What is the company's intrinsic price-to-book ratio (to two decimal places) if the present value of the next five year’s residual earnings is $1.26 per share and the present value of residual earnings beyond year five is $5.91 per share?

Help In Homework · Accepted Answer

1 Net income = Book value of Equity * ROCE =244*15% =36.6 million Payout ratio = 80% So Dividend = net income * payout ratio =36.6 million *80% =29.28 million Growth rate in Dividends (g)= 3% Cost of Equity (ke)=14.8% D1= D0*(1-g) =29.28*(1+3%) =30.1584 Market value of Equity formula = D1/(ke-g) =30.1584/(14.8%-3%) =255.579661 So Market value of Equity is $255.579661 million 2 We see that the intrinsic price to book ratio is given as=(1.26+5.91)/6.49=1.10477658

Why Choose Us?

0% AI Guarantee

24/7 Support

Plagiarism Free

Expert Tutors

100% Confidential

On-Time Delivery

1 A company has a book value of equity of $244 million, an expected ROCE of 15% and a cost of equity capital of 14

Expert Solution

Archived Solution