Finance question help please would appreciated it a lot?
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05-03-2013, 07:33 PM
Post: #1
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Finance question help please would appreciated it a lot?
You are being offered the opportunity to purchase shares in a new company Facebook. Its Book Equity per Share is currently $200. The company will always generate an ROE of 15% and pays out 70% of earnings as dividends each year (and will do so forever). How much would you be willing to pay per share of Facebook if you demand a rate or return of 14% on your investment?
I have no idea on how to solve this problem if someone please has some knowledge of finance could they please help me. Thank You. Ads |
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05-03-2013, 07:37 PM
Post: #2
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With Equity per share of $200, a 15% return would be $30 per sh, and dividend would be $21 per sh.That's a Growth rate of 4.5%. (i.e. 30% of 15%)
Proof: After one year, Equity per sh would be 209. (200 + 30 - 21). That's a Growth rate of 4.5%. After two years, Equity per sh would be 218.41 (209 + 15%, or 31.35 - 70% of 31.35) That's also a Growth rate of 4.5% The price today of a Constant Growth stock is Next Div / R - G. So Price today = Next Div 21 / 14% - 4.5%, or 21 / .095 = $221.05 Ads |
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