What is rand stock worth per share

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Rand Co.'s current rate of return (ROE) is 14%. It pays out(payout ratio) half of its earnings as dividends. Current book value is $50 per share. Book value per share will grow as Rand reinvests earnings.

Assume ROE and payout ratio stay the same for the next 4 years. After that competition forces ROE down to 11.5% and payout increases to .8. The cost of capital is 11.5%

a. What are Rand's EPS and dividends next year? How will EPS and dividends grow in years 2, 3, 4, and 5 in subsequent years?

b. What is Rand's stock worth per share? How does that value depend on the payout ratio and growth rate after year 4?

Include formulas used to calculate EPS and dividends as well as stock worth per share. Please answer part b question - "How does that value depend on the payout ratio and growth rate after year 4?"

 

Reference no: EM13284164

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