A mature U.S. telecommunicationscompany expects to pay a dividend per share of $6 next year (paidannually at the end of the year) and expects the dividend to growat a constant rate in the future. The firm’s equity beta equals0.65. The risk free rate is 3%, and the expected return on thestock market index is 8%. The firm reinvests 20% of its earnings atan ROE of 12.5%. The current book value per share is $60. With thisinformation, please answer the following twoquestions.
- Determine the required return on the stock based on CAPM andcalculate the intrinsic value per share for the telecommunicationscompany. Also explain the difference between the market value andthe book value per share. Motivate your answer and show yourcalculations.
- Suppose the firm wants to grow at a higher rate of 7.5% in thefuture. If the firm keeps its ROE at 12.5%, what would be theimpact of this strategy on the dividend in the short run and thevalue per share? And what would be the impact on the dividends andthe value per share if the firm expects to increase its ROE to 15%?Explain your answer (no calculations are needed).
