Justin Cement Company has had the following pattern of earnings per share over t

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.)

       

  Year Earnings
Per Share   2006 $ 8.00   2007 8.48   2008 8.99   2009 9.53   2010 10.10

Explanation / Answer

Growth rate of the company would be given by

EPS 2010/EPS 2009 =10.10/9.59 -1 =5.95 =6%

Hence the EPS for the next year =10.1*1.06 =10.706

Dividend would be 40% of this value =.4*10.706 =4.2824

Now Ke represents the required rate of return =13%

Dividend Next year =4.2824

G=6%

Stock price = Dividend Next year/( Ke-g)

=4.284/(13%-6%) =61.177

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