Consider the case of a company that has just paid a $0.80 dividend per share. The company expects for the next five year to keep constant the 40% payout ratio and a ROE declining from 20% to 12% (with a 2% annual step). After this period the company will increase its payout Find: to 70% and the ROE will stabilise at 12% level. The required rate of return is 11%.
1. The stock price
2. The PE ratio
3. The present value of growth opportunities (PVGO)
4. The new stock price in response to a 1% increase in the required rate
5. The new stock price in response to a 1% decrease in the LT ROE
6. The new stock price in response to a 10% decrease in the LT payout ratio
