Calculation of g and EPS Sidman Products\' common stock currently sells for $47

Question

Calculation of g and EPS

Sidman Products' common stock currently sells for $47 a share. The firm is expected to earn $5.17 per share this year and to pay a year-end dividend of $3.80, and it finances only with common equity.

If investors require a 11% return, what is the expected growth rate? Round your answer to two decimal places.


--------------------------------%

If Sidman reinvests retained earnings in projects whose average return is equal to the stock's expected rate of return, what will be next year's EPS? (Hint: g = (1 - Payout rate)(ROE).) Round your answer to the nearest cent.

___________________per share

Explanation / Answer

Hi,

Part A:

Required Return = D1/Current Stock Price + Growth Rate

11 = 3.80/(47) + Growth Rate

Growth Rate = 11 - 3.80/47 = 10.92%

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Part B:

Current EPS = 5.17

Less Expected Dividend = 3.80

Retained Earning Per Share = 1.37

Increase in EPS = Rate of Return*Retained Earning Per Share = 1.37*11% = .1507

Next Year EPS = Increase in EPS + Current EPS = 5.17 + .1507 = $5.32

Thanks.

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