Competition forces roe down

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Q. Company Q's current return on equity (ROE) is 14%. It pays out part of its earnings as cash dividends (payout ratio = .5). Current book value per share is $50. Book value per share will grow as Q reinvests earnings.

Assume that the ROE and payout ratio stay constant for the next four years. After that, competition forces ROE down to 11.5% and the payout ratio increases to 0.8. The cost of capital is 11.5%.

Reference no: EM13101466

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