Problem 9-12 Calculation of g and EPS Spencer Supplies\'s stock is currently sel

Question

Problem 9-12
Calculation of g and EPS

Spencer Supplies's stock is currently selling for $60 a share. The firm is expected to earn $5.70 per share this year and to pay a year-end dividend of $2.70.

Spencer Supplies's stock is currently selling for $60 a share. The firm is expected to earn $5.70 per share this year and to pay a year-end dividend of $2.70. If investors require a 9.5% return, what rate of growth must be expected for Spencer? If Spencer reinvests earnings in projects with average returns equal to the stock's expected rate of return, then what will be next year's EPS? (Hint: g = ROE times Retention ratio.)

Explanation / Answer

1.Price = D1/(r-g) 60= 2.7/(9.5%-g) g= 5.00% rate of growth must be expected for Spencer= 5.00% 2. ROE = 9.5% Retention ratio = (5.7-2.7)/5.7= 52.63% g= 9.5%*52.63% = 5.00% next year's EPS = 5.7*(1+5%) =$5.99

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.