Calculating the market value of firm's common equity
Not what you're looking for?
Assume a firm has been growing at a 15 percent annual rate and is expected to continue to do so for 3 more years. At that time, growth is expected to slow to a constant 4 percent rate. The firm maintains a 30 percent payout ratio, and this year's retained earnings were $1.4 million. The firm's beta is 1.25, the risk-free rate is 8 percent, and the market risk premium is 4 percent. If the market is in equilibrium, what is the market value of the firm's common equity (1 million shares outstanding)?
Purchase this Solution
Solution Summary
The solution depicts the formulas and methodology to find the market value of firm's common equity in the given case. Market equilibrium is examined......
Solution Preview
This year's retained earnings=$1.4 million
Payout ratio=30%
Retained earnings =Net earnings*(1-Payout ratio)
Net earnings=Retained earnings/(1-payout ratio)=1.4/(1-30%)=2.0 million
Dividend=Net earnings*payout ratio=2*30%=$0.6 million
Number of shares outstanding = 1million
Current Dividend per share=Do=$0.6 million/1 million=$0.6
Let us ...
Education
- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
Recent Feedback
- "Thank you"
- "Really great step by step solution"
- "I had tried another service before Brain Mass and they pale in comparison. This was perfect."
- "Thanks Again! This is totally a great service!"
- "Thank you so much for your help!"
Purchase this Solution
Free BrainMass Quizzes
Managing the Older Worker
This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce
Business Processes
This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.
Balance Sheet
The Fundamental Classified Balance Sheet. What to know to make it easy.
Organizational Leadership Quiz
This quiz prepares a person to do well when it comes to studying organizational leadership in their studies.
IPOs
This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)