Assume an All Equity Firm Has Been Growing at a 15

Multiple Choice

Assume an all equity firm has been growing at a 15 percent annual rate and is expected to continue to do so for 3 more years. At that time, growth is expected to slow to a constant 4 percent rate. The firm maintains a 30 percent payout ratio, and this year's retained earnings net of dividends were $1.4 million. The firm's beta is 1.25, the risk-free rate is 8 percent, and the market risk premium is 4 percent. If the market is in equilibrium, what is the market value of the firm's common equity (1 million shares outstand¬ing) ?

A) $ 6.41 million
B) $12.96 million
C) $ 9.18 million
D) $10.56 million
E) $ 7.32 million