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 per share. The firm is expected to earn $6.00 per share this year and to pay a year-end dividend of $2.50.

If investors require a 10% return, what rate of growth must be expected for Spencer? Round your answer to two decimal places.
     %

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 × Retention ratio.) Round your answer to the nearest cent.
$  

Explanation / Answer

Price of a stock can be calculated using the formula as follows

Price = D1 / (K-g)

Here D1 is Next year Dividend, K is required rate of return, g is growth rate

D1 is given as 2.5, K is 10%, Price is 60, g can be calculated

After substituting all numbers in above equation, we get g as 5.83%

b) Next year EPS = Current year EPS * (1+g) = 6 *(1+5.83%) = $6.35

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

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