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: Year Earnings per Share $4.00 4.20 4.41 4.63 4.86 2012 2013 2015 2016 The EPS (earnings per share) has 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 (2017). If the required rate of return (Ke) is 13 percent, what is the anticipated stock price ( at the beginning of 2017? Select one: a. $25.50 b. $36.25 c. $47.89 d. $53.79

Explanation / Answer

ANSWER

STEP 1 : CALCULATION OF "CONSTANT" GROWTH RATE {g}

g = { EPS 2013 (-) EPS 2012 } / EPS 2012  

= ( 4.2 - 4 ) / 4

= 5 %

STEP 2 : CALCULATION OF EXPECTED DIVIDEND FOR YEAR 2017 {D1}

D1 = (EPS 2016 + growth) * 0.40

= (4.86 + 0.24) * 0.4

= $ 2.04

STEP 3 : CALCULATION OF STOCK PRICE AT BEGINNING OF YEAR 2017

P0 = D1 / (Ke - g)

= 2.04 / (0.13 - 0.05)

= 2.04 / 0.08

= $ 25.50

ie Option (a)

IF ANY DOUBT PLEASE ASK IN COMMENT :)

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