You Are Attempting to Value MNC Inc

Question

Examlex · Accepted Answer

The Answer is Based on the industry data,cost of equity for each division in the company can be calculated using CAPM

R _ { f } + \left( R _ { m } - R _ { f } ight) \beta

_.
_{The ROE for}_{each division can be ca}_{lculated using the price-to-earnings relationship}

\frac { P _ { 0 } } { E _ { 1 } } = \frac { 1 - b } { k - b r }

\begin{array} { c c c } ext { Divizion } & ext { Cost of equity } & ext { ROE } \\hline ext { A } & 16.75 \% & 19.58 \% \ ext { B } & 18.50 \% & 21.33 \% \ ext { C } & 15.00 \% & 10.00 \%\end{array}

ROE of the firm is the weighted average of ROE's for different divisions of the firm,with earnings being the weights.
ROE of the firm =

\left( \frac { 2 } { 11 } imes 19.58 \% ight) + \left( \frac { 5 } { 11 } imes 21.33 \% ight) \left( \frac { 4 } { 11 } imes 10 \% ight)

= 16.89%
Given the retention ratio of 0.5
The growth rate of the firm can be calculated using

ext { (Retention ratio } imes \mathrm { ROE } ext { ) }

= 0.5 × 16.89% = 8.45%

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