Problem 4-24 Zenith Propulsion, Inc., is expected to pay a dividend next year of
ID: 2724331 • Letter: P
Question
Problem 4-24
Zenith Propulsion, Inc., is expected to pay a dividend next year of $2.15 per share. Investors think that Zenith will continue to increase its dividend by 6% each year for the foreseeable future.
If the required rate of return on Zenith stock is 14%, then what is Zenith's stock price? Round your answer to two decimal places.
$
Investors expect Zenith to pay out 50% of its earnings as dividends. What is Zenith's price/earnings ratio? (Here P/E is defined as current price divided by next year's earnings.) Round your answer to two decimal places.
Maintaining all the other assumptions, recalculate Zenith's stock price if investors expect dividends to grow at 7% per year rather than at 6%? Round your answer to two decimal places.
$
Maintaining all the other assumptions, recalculate Zenith's P/E ratio if investors expect dividends to grow at 7% per year rather than at 6%? Round your answer to two decimal places.
Problem 4-24
Zenith Propulsion, Inc., is expected to pay a dividend next year of $2.15 per share. Investors think that Zenith will continue to increase its dividend by 6% each year for the foreseeable future.
If the required rate of return on Zenith stock is 14%, then what is Zenith's stock price? Round your answer to two decimal places.
$
Investors expect Zenith to pay out 50% of its earnings as dividends. What is Zenith's price/earnings ratio? (Here P/E is defined as current price divided by next year's earnings.) Round your answer to two decimal places.
Maintaining all the other assumptions, recalculate Zenith's stock price if investors expect dividends to grow at 7% per year rather than at 6%? Round your answer to two decimal places.
$
Maintaining all the other assumptions, recalculate Zenith's P/E ratio if investors expect dividends to grow at 7% per year rather than at 6%? Round your answer to two decimal places.
Explanation / Answer
1
Calculation of Zenith's stock price:
Formula :
Stock Price = (Expected Dividend / (Required Rate- Growth Rate )
= 2.15 / (14% - 6%) =
$ 26.88
2
Calculation of Zenith's price/earnings ratio:
Formula :
Price/earnings ratio =Current price / next year's earnings
Current Price =
$ 26.88
Next year's earnings = Next year's Dividend / Payout ratio
= 2.15 / 50% =
$ 4.30
Price/earnings ratio =Current price / next year's earnings =
6.25
3
Calculation of Zenith's stock price:
Formula :
Stock Price = (Expected Dividend / (Required Rate- Growth Rate )
Expected Dividend = 2.15 *107% / 106% =
$ 2.17
Stock Price = (Expected Dividend / (Required Rate- Growth Rate )
= 2.17 / (14% - 7%) =
$ 31.00
4
Calculation of Zenith's price/earnings ratio:
Formula :
Price/earnings ratio =Current price / next year's earnings
Current Price =
$ 31.00
Next year's earnings = Next year's Dividend / Payout ratio
= 2.17 / 50% =
$ 4.34
Price/earnings ratio =Current price / next year's earnings =
7.14
1
Calculation of Zenith's stock price:
Formula :
Stock Price = (Expected Dividend / (Required Rate- Growth Rate )
= 2.15 / (14% - 6%) =
$ 26.88
2
Calculation of Zenith's price/earnings ratio:
Formula :
Price/earnings ratio =Current price / next year's earnings
Current Price =
$ 26.88
Next year's earnings = Next year's Dividend / Payout ratio
= 2.15 / 50% =
$ 4.30
Price/earnings ratio =Current price / next year's earnings =
6.25
3
Calculation of Zenith's stock price:
Formula :
Stock Price = (Expected Dividend / (Required Rate- Growth Rate )
Expected Dividend = 2.15 *107% / 106% =
$ 2.17
Stock Price = (Expected Dividend / (Required Rate- Growth Rate )
= 2.17 / (14% - 7%) =
$ 31.00
4
Calculation of Zenith's price/earnings ratio:
Formula :
Price/earnings ratio =Current price / next year's earnings
Current Price =
$ 31.00
Next year's earnings = Next year's Dividend / Payout ratio
= 2.17 / 50% =
$ 4.34
Price/earnings ratio =Current price / next year's earnings =
7.14
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