What is child share price

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The return on equity (ROE) of Child SA is 14 per cent and it has a payout ratio of 0.5. Current book value per share is €50 and the book value will grow as the firm reinvests earnings. Assume that the ROE and payout ratio stay constant for the next 4 years. After that, competition forces ROE down to 11.5 per cent, and the payout ratio increases to 0.8. The appropriate discount rate is 11.5 per cent.

Required:

Problem 1. What are Child's EPS and dividends next year?

Problem 2. How will EPS and dividends grow in years 2, 3, 4, 5 and subsequent years?

Problem 3. What is Child's share price

Problem 4. How does that value depend on the payout ratio and growth rate after year 4?

Reference no: EM132751806

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