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  3. bvpscurrent = $95. roeearly = 16% for next 5 yrs r

BVPSCurrent = $95. ROEEarly = 16% for next 5 yrs ROELate = 4% after 5 yrs (in perpetuity) Expected...

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Finance

BVPSCurrent = $95.

ROEEarly = 16% for next 5 yrs

ROELate = 4% after 5yrs (in perpetuity)

Expected ROE (discount rate) = 5.1 %

Above numbers are independent from plow backs/ policybelow.  

Dividend Policy:
Plow back = 90% of earnings in early period.  
Plow back = 20% of earnings in late period

Question: What is the price of your stocktoday?

Answer & Explanation Solved by verified expert
4.5 Ratings (837 Votes)

g=Growth Rate =ROE*Plow back
Growth Rate Early=0.9*16%= 14.4%
g1=Growth Rate early 14.4%
g2=growth rate in late period=0.2*4% 0.80%
D0 Current Dividend =(1-0.9)*16%*95 $1.52
D1=D0*(1+g1) Dividend in year1 $1.74 (1.52*1.144)
D2=D1*(1+g1) Dividend in year2 $1.99 (1.74*1.144)
D3=D2*(1+g1) Dividend in year3 $2.28 (1.99*1.144)
D4=D3*(1+g1) Dividend in year4 $2.60 (2.28*1.144)
D5=D4*(1+g1) Dividend in year5 $2.98 (2.60*1.144)
D6=D5*(1+g2) Dividend in year6 $3.04 (2.98*1.08)
Price in year 5=P5=D6/(R-g2)
R=Discount Rate=5.1%=0.051
P5=3.04/(0.051-0.008)= $70.65
Present Value (PV) of Cash Flow:
(Cash Flow)/((1+i)^N)
i=Discount Rate=5.1%=0.051
N=Year of Cash Flow
N A B=A/(1.051^N)
Year Cash flow PV of cash flow
D1 1 $1.74 1.654500476
D2 2 $1.99 1.800902516
D3 3 $2.28 1.960259256
D4 4 $2.60 2.133717021
D5 5 $2.98 2.32252357
P5 5 $70.65 55.09241957
SUM $64.96
PRICE OF THE STOCK =Present Value of Future Cash Flows
PRICE OF THE STOCK TODAY $64.96

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Transcribed Image Text

BVPSCurrent = $95.ROEEarly = 16% for next 5 yrsROELate = 4% after 5yrs (in perpetuity)Expected ROE (discount rate) = 5.1 %Above numbers are independent from plow backs/ policybelow.  Dividend Policy:Plow back = 90% of earnings in early period.  Plow back = 20% of earnings in late periodQuestion: What is the price of your stocktoday?

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