The ABC Company has had the following pattern of earnings per share over the las
ID: 2634520 • Letter: T
Question
The ABC Company has had the following pattern of earnings per share over the last five years:
Year Earnings per Share
2009........................... $4.00
2010........................... 4.20
2011........................... 4.41
2012........................... 4.63
2013........................... 4.86
The earnings per share have grown at a constant rate (on a rounded basis) and will continue to do so in the future. Dividends represent 40 percent of earnings. Project earnings and dividends for the next year (2014).
If the required rate of return (rs) is 13 percent, what is the anticipated stock price (P0) at the beginning of 2014?
Explanation / Answer
Earning
Growth
2009
4
2010
4.2
5.00%
2011
4.41
5.00%
2012
4.63
4.99%
2013
4.86
4.97%
Earning growth rate = 5%
Earning next year = 4.86*1.05 =5.103
Dividend next year = 0.4*5.103= 2.0412
Dividend growth rate= 5%
Require rate of return = 13%
Price P of stock = Div1/(13%-5%) =2.0412/(13%-5%) = 25.515
Earning
Growth
2009
4
2010
4.2
5.00%
2011
4.41
5.00%
2012
4.63
4.99%
2013
4.86
4.97%
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