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Foundations Of Financial Management
Found in: Page 326
Foundations Of Financial Management

Foundations Of Financial Management

Book edition 16th
Author(s) Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Pages 768 pages
ISBN 9781259277160

Short Answer

Question: Justin Cement Company has had the following pattern of earnings per share over the last five years:

Year Earnings per Share

20X1 ................... $5.00

20X2 ................... 5.30

20X3 ................... 5.62

20X4 ................... 5.96

20X5 ................... 6.32

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 (20X6).

If the required rate of return (Ke) is 13 percent, what is the anticipated stock price (P0) at the beginning of 20X6?

Answer

The anticipated price is $38.28

See the step by step solution

Step by Step Solution

Step 1 Computation of growth rate

Year

EPS

Calculations

Growth rate

20X1

5

20X2

5.3

(5.3-5)/5

6.00%

20X3

5.62

(5.62-5.3)/5.3

6.04%

20X4

5.96

(5.96-5.62)/5.62

6.05%

20X5

6.32

(6.32-5.96)/5.96

6.04%

Growth Rate =

6.00%

 Step 2: Computation of EPS for 20x6

Step 3: Computation of Dividend for 20x6

Step 4: Computation of anticipated price (P0) at the beginning 20x6

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