Contrary to the conservative securities analysts, Ms. Parker feels that the comp
ID: 2718793 • Letter: C
Question
Contrary to the conservative securities analysts, Ms. Parker feels that the company could maintain a constant annual growth rate in dividends per share of 11.5% in the future, or possibly 15% for the next 2 years and 11.5% thereafter. Ms. Parker based his estimates on an established long-term expansion plan throughout the United States, Canadian and Mexican markets. Venturing into these markets was expected to cause the risk of the firm, as measured by the beta on its stock, to increase immediately from 1.1 to 1.5.
(1) If Ms. Parker predictions are correct, what will be the value per share of Candy land's stock if the firm maintains a constant annual 11.5% growth rate in future dividends? (Note: Continue to use the new required return here.) (show work and formulas used)
(2) If Ms. Parker predictions are correct, what will be the value per share of Candy Land's stock if the firm maintains a constant annual 15% growth rate in dividends per share over the next 2 years and 11.5% thereafter? (Note: Use the new required return here.) (show work and formulas used for all answers)
Data item
2015 value
Earnings per share (EPS)
$8.26
Price per share of common stock
$104.25
Book value of common stock equity
$325,000,000
Total common shares outstanding
8,300,000
Common stock dividend per share
$4.05
Data Points
Beta, b
Required Return, K
0
2.25%
.25
4.600%
.5
6.950%
.75
9.300%
1
11.650%
1.25
14.000%
1.5
16.350%
1.75
18.700%
2.0
21.050%
Data item
2015 value
Earnings per share (EPS)
$8.26
Price per share of common stock
$104.25
Book value of common stock equity
$325,000,000
Total common shares outstanding
8,300,000
Common stock dividend per share
$4.05
Data Points
Beta, b
Required Return, K
0
2.25%
.25
4.600%
.5
6.950%
.75
9.300%
1
11.650%
1.25
14.000%
1.5
16.350%
1.75
18.700%
2.0
21.050%
Explanation / Answer
Value per share = Next year dividend / rate of return - growth rate
= $4.516 / (15.8% - 11.5%)
= $4.516 / 4.3%
=$105.02
Note:
Next year dividend = current year (1+ growth rate)
= $4.05 (1+ 0.115)
= $4.516
Rate of return = growth rate + next year dividend / current price
= 0.115 + $4.516 / $104.25
= 0.115 + 0.043
= 15.8%
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