(6 pts) ABC company current stock price is $50. The most recent Earnings per Sha

Question

(6 pts) ABC company current stock price is $50. The most recent Earnings per Share reported was $3.00 (assume this EPS number was just reported yesterday). You expect the company's Earnings to increase by 8% next year and 7% the following year. In two years you are expecting the company's stock will trade at a P/E multiple of 22. Your required rate of return for ABC is 10%. If you expect the company to maintain a 30% dividend payout ratio, fill in the following information used to estimate the intrinsic value (you do not have to estimate the intrinsic value just fill in the blanks below) Yr 1 EPS = Yr 2 EPS = Yr. 2 Div = Yr 1 Div = Yr 2 Horizon Value =

Explanation / Answer

Year 1 EPS = $3 x 1.08 = $3.24

Year 2 EPS = $3.24 x 1.07 = $3.4668 or $3.47

Now, we have a dividend payout ratio of 30% which means dividends would be 30% of earnings (EPS).

Year 1 Div = $3.24 x 30% = $0.972

Year 2 Div = $3.47 x 30% = $1.041

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