Return on equity will be constant

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Reference no: EM131303590

Suppose investors in Nike have a 12.5% cost of equity. Based on Analysts’ forecasts you expect Nike to have earnings per share of $2.40 in one year and earnings per share of $2.70 in two years. After two years you expect return on equity (ROE) to be a constant rate of 15% per year. Every year you expect Nike to payout 20% of earnings as dividends. Additionally, Nike currently has book value of equity per share of $7.30. What price should Nike trade at today rounded to the nearest dollar? You should assume that after year 3 the sustainable growth rate will be constant, the payout ratio will be constant, and return on equity (ROE) will be constant.

Reference no: EM131303590

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