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Homework answers / question archive / You buy a stock which has the following features: Price: ?500 EPS: ?33

You buy a stock which has the following features: Price: ?500 EPS: ?33

Finance

You buy a stock which has the following features:

Price: ?500

EPS: ?33.3

Payout ratio: 25%

Projected EPS growth: 15%

What will EPS have to be equal to in year 3 for you to get a 12% return on your investment? What will the share be worth then?

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Given,

EPS = 33.3

Payout Ratio = 25%

Dividend per Share (DPS) = 33.3*25% = 8.325

Dividend per Share (DPS) in Year 1 = 8.325*(1+15%) = 9.574

Dividend per Share (DPS) in Year 2 = 9.574*(1+15%) = 11.010

Dividend per Share (DPS) in Year 3 = 11.010*(1+15%) = 12.661

 

Earning per Share (EPS) = DPS for Year 3/Payout Ratio

= 12.661 / 25%

= 50.64

 

P/E = MPS / EPS = $665.46 / $50.64 = 13.14

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