Sidman Products\' common stock currently sells for $46 a share. The firm is expe

Question

Sidman Products' common stock currently sells for $46 a share. The firm is expected to earn $5.52 per share this year and to pay a year-end dividend of $3.80, and it finances only with common equity.

If investors require a 12% return, what is the expected growth rate? Round your answer to two decimal places.

%

If Sidman reinvests retained earnings in projects whose average return is equal to the stock's expected rate of return, what will be next year's EPS? (Hint: g = (1 - Payout rate)(ROE).) Round your answer to the nearest cent.

Explanation / Answer

If we assume a constant growth rate g for the compdany's dividens,
P0 = Div1/ (r-g)

where P0 is current price = $46

Div1= Current period dividend per share = $3.80

r = Expected rate of return = 0.12

Thus, g = 0.12 - 3.8/46 = 0.0374 = 3.74%

As the retained earnings have the same rate of return,

E1 = E0 (1+r) = 5.52* (1.12) = $6.18

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