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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: ?33.3
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?
Expert Solution
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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