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NCH Corporation, which markets cleaning chemicals, insecticides and other products, paid dividends of $2.00 per share in 1993 on earnings of $4.00 per share. The book value of equity per share was $40.00, and earnings are expected to grow 6% a year in the long term. The stock has a beta of 0.85, and sells for $60 per share. (The treasury bond rate is 7%.). How much would the return on equity have to increase to justify the price/book value ratio at which NCH sells for currently?

Respuesta :

TomShelby

Answer:

The reutrn on equity should be of 9.53%

Explanation:

We can solve the return on equity by considering the gordon model of dividend growth:

[tex]\frac{divends_1}{return_{equity}-growth} = Intrinsic \: Value[/tex]

current dividends 2 dollars

next year dividends: current x (1 + g) = 2 x (1 + 0.06) = 2.12

[tex]\frac{2.12}{return_{equity}-0.06} = 60[/tex]

[tex]\frac{2.12}{60} +0.06= Ke[/tex]

Ke = 0.09533 = 9.53%

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