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Homework answers / question archive / 5) Consider the following information which relates to a given company: Item 2019 Value Earnings Per Share $6

5) Consider the following information which relates to a given company: Item 2019 Value Earnings Per Share $6

Finance

5) Consider the following information which relates to a given company: Item 2019 Value Earnings Per Share $6.96 Price Per Share (Common Stock) $36.37 Book Value (Common Stock Equity) $64.37 Million Total Common Stock Outstanding 2.2 Million Dividend Per Share $4.81 Analysts expect that the company could maintain a constant annual growth rate in dividends per share of 6.44% in the future, or possibly 9% for the next 2 years and 6.8% thereafter. In addition, it is expected that the risk of the firm, as measured by the risk premium on its stock, to increase immediately from 8.31% to 12.77%. Currently, the risk-free rate is 5.19%. Required: Assuming no growth in future dividends, and a required return of 16.63%, find the value per share of the firm's stock.

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Answer:

Calculation of value per share as per Gordon's Growth Model:

As per Gordon's Growth Model:

Value per share (In case of no growth) = Dividend Per share / Required rate of return

As the question asked to assume no growth the calculation of value per share is as under:

Dividend Per share = $4.81

Required rate of return = 16.63% or 0.1663

Therefore Value per share = Dividend Per share / Required rate of return

= $4.81 / 0.1663

= $28.92

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