You expect that Bean Enterprises will have earnings per share of $2 for the comi

Question

You expect that Bean Enterprises will have earnings per share of $2 for the coming year. Bean plans to retain all of its earnings for the next three years. For the subsequent two years, the firm plans on retaining 50% of its earnings. It will then retain only 25% of its earnings from that point forward. Retained earnings will be invested in projects with an expected return of 20% per year. If Bean's equity cost of capital is 12%, then the price of a share of Bean's stock is closest to:

A) $17.00

B) $10.75

C) $27.75

D) $43.50

Explanation / Answer

Working:

Earnings:

Dividends:

P0 = 1.73 / (1.12)4 + 1.90 / (1.12)5 + (3.14 / (0.12 - 0.05)) / 1.125 = 27.63

Answer : C $ 27.75

Years Earnings Dividends g 1 $2 $0 20% 2 $2.40 $0 20% 3 $2.88 $0 20% 4 $3.46 $1.73 10% 5 $3.80 $1.90 10% 6 $4.18 $3.14 5%

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