Company q's current return on equity (roe) is 20%. It currently pays out earnings as cash dividends using a payout ratio of 0.5. Current book value per share, i.E. At the start of year 1, is $50. Book value per share will grow as q reinvests earnings. Assume that the roe and payout ratio stay constant at their current levels for the next three years. After that, i.E. Starting in year 4 and going on forever thereafter, competition forces roe down to 10% and the payout ratio increases to 0.8. The cost of capital is 10%.
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Company q's current return on equity (roe) is 20%. It currently pays out earnings as cash dividends using a payout ratio of 0.5. Current book value per share, i.E. At the start of year 1, is $50. Book value per share will grow as q reinvests earnings. Assume that the roe and payout ratio stay constant at their current levels for the next three years. After that, i.E. Starting in year 4 and going on forever thereafter, competition forces roe down to 10% and the payout ratio increases to 0.8. The cost of capital is 10%.
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