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i) Bovine Cash leads a very placid existence: it always pays out all of its earnings as dividends; as a result, its earnings per share remain at $2.40 forever. Bovine Cash's required rate of return is 6%. What is Bovine Cash's fair stock price?
ii) Likewise, Run-of-the-Mill's, Inc. (RoM) predicted earnings next year are $2.40; its required rate of return is also 6%. However, RoM retains most of its earnings and keeps acquiring smaller, equally glamorous firm; the return on its investments is equal to 6%. What is Run-of-the-Mill's fair stock price?
iii) Specifically, Run-of-the-Mill always distributes 25% of its earnings, and reinvests the remaining 75% (with a return of 6% as above). What is RoM's dividend next year?
iv) How fast will RoM's dividends grow?
v) When will RoM's dividends surpass those of Bovine Cash? Hint: you may use the doubling rule to give an approximate answer.
vi) What is the PV of all future dividends? Compare to ii) and describe briefly.

Microeconomics, Economics

  • Category:- Microeconomics
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