finance 7. A company just reported earnings per share of $10.00 paid a dividend
ID: 2786262 • Letter: F
Question
finance 7. A company just reported earnings per share of $10.00 paid a dividend of $6.00 a share. Based on the company's risk, shareholders require a return of 9% on its stock. You believe the stock's earnings and dividends will grow 4% a year indefinitely. a. What would you expect the stock's price to be currently? b. What would you expect the stock's price to be ome year from now? c. If you buy the stock for the price you determined in part (a), hold it for one year and then sell it for the price you determined in part (b), will you earn a 9% return? Explain.Explanation / Answer
ans (a)
current dividend D0= 6. Dividend expected a year hence= D1= D0(1+g)
D1= 6 ( 1+ 0.04)= 6.24
P0= D1/(r-g), where P0 is current price, D1 is dividend expected 1 year hence, r is the required rate of return on the equity share and g is the growth rate
P0= curent price= 6.24/(0.09-0.04)
6.24/0.05= $124.8
ans (b)
P1=price after 1 year= D2/(r-g)
D2= D1(1+g)
= 6.24(1+0.04)= 6.24* 1.04=6.49
P1= 6.49/(0.09-0.04) = 6.49/0.05= $129.8
ans (c)
capital gain = 129.8-124.8= $5 and dividend received for the year=$4 , So total = 5+4=$9
return= 9/124.8* 100= 8.81%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.