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   2006 $ 10.00   2007 10.60   2008 11.24   2009 11.91   2010 12.62 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. a.Project earnings and dividends for the next year (2011). 2011   Earnings $ Dividend $ If the required rate of return (Ke) is 13 percent, what is the anticipated stock price (P0) at the beginning of 2011? Anticipated stock price $

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Explanation / Answer

Growth rate is constant

There fore growth rate = (10.6-10)/10*100 = 6%

2011 earnings = 2010 earnings*(1 + growth rate) = 12.62*(1+0.06) = 13.3772

Dividends = 40% 0f earnings

2011 dividend = .4*13.3772 = 5.35088

anticipated stock price = dividend/(required rate - growth rate)

=5.35088/(.13-.06) = 76.441

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