Compute the ex-dividend stock price at time

Reference no: EM132162147

Question - The profitability of the company and its investment policy are summarized in the following table:

	0	1	2	3
ROE		0.28	0.23	0.13
Plowback Ratio		0.88	0.57	0.54
Book Value per share	$100

Use the convention (formula: Earnings (Earnings per share) at time t = Return on Equity at time t - Book Value at time t-1) Assume ROE and the plow-back ratio will remain unchanged after year 3 (same as in year 3). Assume that the appropriate discount rate for the cash flows of ABC is 13.0%. The term structure of risk-free interest rates is flat at 2% for all maturities.

(a) Compute the ex-dividend stock price at time 0.

(b) What is the value of growth opportunities of the company at time 0?

(d) Compute the expected return (over a single-period) on the stock of the company at time 0 (in %).

Reference no: EM132162147

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