1.Over the past 5 years the earnings per share (EPS) of a local firm have grown

Question

1.Over the past 5 years the earnings per share (EPS) of a local firm have grown from $0.62 to $0.91. If an investor in this firm is assumed to have a required rate of return of 14%, what is the current value of its common stock if its current dividend is 0.12 (D0 = $0.12)? Assume EPS (and therefore its dividends per share) will continue to grow at a constant rate

2.

What is the current value of a share of common stock if its current dividend (D0) is $1.50 and dividends are expected to grow at an annual rate of 20 percent for the next 5 years? Assume the investor has a required rate of return of 15 percent and expects to sell the security in 5 years for $72.

Explanation / Answer

Growth rate has been 8% in EPS.

.12*(1.08)/.14-.08= 2.16

1.50 * (1.20)/(1.15) +1.50*(1.20)^2/1,15^2 +.........+ 1.50*1.20^5/1.15^5 + 72/1.15^5

I'll let you do the math.

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