15 152 (0.15-0.06) × (152) = $37.39 QUESTION 27 ANSWER

1.15 1.15

²

(0.15-0.06) × (1.15

²

) = $37.39 Question 27 Answer: C The easiest way to solve this problem is to realize that: The growth rate for dividends = the expected capital gain yield = 10% => (P

₁

– P

₀

)/P

₀

= 10% => ($50 – P

₀

)/P

₀

= 10%. Solve for Po. Po = $45.45. Or alternatively P

1

= D

1

*(1 +g))/r-g  50=D

1

*(1.10) / (0.16-0.10)  D1 = 2.7272 P

₀

= D

₁

/r-g  P

0

= 2.7272/.06 = $45.45 Question 28 Answer C g = ROE × plowback ratio = ROE × (1 – payout ratio) 5% = ROE × (1 – 70%)  ROE = 16.67% 10