Problem:
Frisker Motors is expected to have earnings of $6.00 per share at the end of the next year (date 1). Frisker will retain 75 percent of its earnings at the end of each of the next three years to finance new investments having a rate of return on equity ROE of 28 percent. Beginning with the end of year four and continuing forever after, Frisker plans to increase its dividend payout to 60 percent of earnings.
Required:
Question: Assuming that Frisker has a required rate of return of 12.5 percent and that the long-run expected ROE for Frisker's new investments is 18.75 percent, determine the value of shares in Frisker Motors.
Note: Be sure to show how you arrived at your answer.