Trend-Line Inc. has been growing at a rate of 6% per year and is expected to con

Question

Trend-Line Inc. has been growing at a rate of 6% per year and is expected to continue to do so indefinitely. The next dividend is expected to be $5 per share. a. If the market expects a 10% rate of return on Trend-Line, at what price must it be selling? (Do not round intermediate calculations.) b. If Trend-Line’s earnings per share will be $8 next year, what part of its value is due to assets in place? (Do not round intermediate calculations.) c. If Trend-Line’s earnings per share will be $8 next year, what part of its value is due to growth opportunities? (Do not round intermediate calculations.)

Explanation / Answer

Price = Dividend / (Rate of return - growth rate)

= 5/(.1-.06) = $ 125

If Trendline followed a zero-plowback strategy, it could pay a perpetual dividend of $8.

Its value would be $8/0.10= $80.

Therefore, the value of assets in place is $80.

The remainder of its value must be due to growth opportunities, so:

Value due to growh opportunities = $125 – $80 = $45

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