Jones Co., a car manufacturer located in southern Illinois, just reported earnin

Question

Jones Co., a car manufacturer located in southern Illinois, just reported earnings per share (EPS) today of $2.00 and is expected to grow its earnings by 15% per year for the next three years. After which, their earnings growth will settle down to 5% per year. The CFO of Jones Co. just announced that the firm will never pay a single dividend to any of its shareholders. The management team is fully entrenched and there is no chance of a successful takeover. If investors demand a 12% return, what is the price of Jones Co.'s stock?

Explanation / Answer

PV factor Present Year Cashflows at 12% rate Value 0             2.00               1.00                     2.00 1             2.30               0.89                     2.05 2             2.65               0.80                     2.11 3             3.04               0.71                     2.17 4          26.62               0.64                  16.92 Total                  25.24 Current Value per stock = 25.24 EPS in 4th year = 3.04 x 1.05=3.19 In 5th year at required rate of return of 12% Value of share = EPS/12% = 3.19/12% = 26.62 Answer: 25.24

Related Questions

Navigate

• Browse (All)
• Browse J
• Subjects

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