Justin Cement Company has had the following pattern of earnings per share over t
ID: 2743340 • Letter: J
Question
Justin Cement Company has had the following pattern of earnings per share over the last five years:
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 (2011). (Round the growth rate to the nearest whole percent. Do not round any other intermediate calculations. Round your answers to 2 decimal places.)
If the required rate of return (Ke) is 13 percent, what is the anticipated stock price (P0) at the beginning of 2011? (Round the growth rate to the nearest whole percent. Do not round any other intermediate calculations. Round your answer to 2 decimal places.)
Per Share 2006 $ 9.00 2007 9.54 2008 10.11 2009 10.72 2010 11.36
Explanation / Answer
Year Earnings Growth rate Per Share in EPS 2006 9 2007 9.54 6.00% 2008 10.11 5.97% 2009 10.72 6.03% 2010 11.36 5.97% So EPS /Dividend growth rate is approx 6% a 2010 EPS =11.36 2011 EPS =11.36*1.06= $ 12.04 2011 Dividend per share =12.04*40%= $ 4.82 b Stock Price at the beginning of 2011. Assume the dividend paid at the end of year So Projected dividend for 2011=D1= $ 4.82 Growth Rate =g=6% Cost of Equity =Ke=13% So Expected stock price at 2011 beginning= 4.82/(13%-6%) = $ 68.86
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