HW 9 – Problem 1, parts a-d (Note that the syllabus says to do Problem 2, but do Problem 1 (below) instead)
1. Bob’s Rawhide Company has a dividend payout ratio of 65%. Next year it will earn $1.25 per share and have a return on equity of 11%. The shareholders’ required return is 8%
a. Calculate the company’s growth rate of EPS.
b. Using the earnings model, what is the value of the stock?
c. Construct a data table that shows how the growth rate and value of the stock will change if the ROE ranges between 10% and 30%, in 1% increments. Now, using that data, create a scatter chart to show the relationship between the value of the stock and the ROE. Is the relationship linear? At what point does the model break down?
d. Using the constant-growth model, what is the value of the stock?