This is an individual assignment covering Topic 3 (Equity Valuation) and Topic 4

Question

This is an individual assignment covering Topic 3 (Equity Valuation) and Topic 4 (Capital Budgeting). The assignment is open book -- you can use any course material. Please refrain from discussing the questions and your solutions with other students. All questions in this assignment are multiple choice and four possible answers are provided. For each question there is one and only one correct answer.

Question 1 of 8 1.0 Points Consider a firm whose earnings per share were $3.00 during the current year (period 0). In other words, E0 = $3.00. The firm reinvests 50% of earnings as capital investments, to maintain annual earnings growth of 4% forever. The appropriate discount rate is 15% per year. What is the current stock price, i.e., P0?
A.$28.36 B.$27.27 C.$14.18 D.$13.64

Explanation / Answer

EPS = $ 3

g = 4% = 0.04

Discount rate = k = 0.15

Dividends = 0.5 * $ 3 = 1.5 (in year 0)

Price of stock = Dividends in year 1 / (k-g) = 1.5*(1.04)/(0.15-0.04) = $ 14.1818

Option C is the correct answer

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