when do equity valuation, RI method, how to determine the DPS? for example: For a company ABC: * Current book value per share is $15.00. * Required rate of return for common stock is 10%. * Forecasted return on equity (ROE) for each of the next four years is , respectively, 40%, 30%, 25%, and 20%. * Annual dividends per share will be $1.00 each year for the next four years. * Although the firm will be profitable after year 4, residual income is expected to be zero. when calculate the RI for next four year, should I use $1.00 or use $15*10%=$1.5? Thanks.
I don’t understand the question. Is DPS = Dividend Per Share? You don’t need to calculate it because they give it to you. That information is there so you can apply the clean surplus concept. BV = 15 NI = 6 Div = 1 RI = 6 - (15*.1) = 4.5 BV = 15 + 6 - 1 = 20 etc etc
To calculate RI, you should take the beginning book value ($15) and multiply it by the difference between ROE and R (.40 - .10). So RI in year 1 is $4.50. For year two the book value increases by Net Income minus Dividend. NI is $15*.40 = $6, dividend is $1, so book value increases to $20. For year two, you would find RI by taking $20 X (.30 - .10) = $4. You can use this logic to find years 3 and 4.