Calculation of g and EPS Spencer Supplies\'s stock is currently selling for $60

Question

Calculation of g and EPS

Spencer Supplies's stock is currently selling for $60 per share. The firm is expected to earn $5.40 per share this year and to pay a year-end dividend of $2.70.

If investors require a 9% return, what rate of growth must be expected for Spencer? Round your answer to two decimal places.
     %

If Spencer reinvests earnings in projects with average returns equal to the stock's expected rate of return, then what will be next year's EPS? (Hint: g = ROE × Retention ratio.) Round your answer to the nearest cent.

Explanation / Answer

Answer: rs=(D1/P0)+g

0.09=($2.70/$60)+g

0.09=0.045+g

g=0.045 or 4.5%

Current EPS                               $5.400

Less: Dividends per share      2.700

Retained earnings per share    $2.700

Rate of return                    ´ 0.090

Increase in EPS                      $0.243

Current EPS                            5.400

Next year's EPS                     $5.643

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