You expect Coles has earnings per share of $6 this year and expect that they will pay out 50% of these earnings to shareholders in the form of a dividend today

Finance Feb 22, 2021

You expect Coles has earnings per share of $6 this year and expect that they will pay out 50% of these earnings to shareholders in the form of a dividend today. Coles's return on new investments is 15% and growth rate is 7%. The value of a share of Coles is closest to:

Select one:

a. $20.06

b. $75

c. $40.12

d. $37.5

Expert Solution

Computation of the value of share:-

Dividend = $6 * 50%

= $3

Value of share = D1 / (Required return - Growth rate)

= $3 * (1 + 7%) / (15% - 7%)

= $3.21 / 8%

= $40.13

Correct option is c). $40.12 ; It is closet to $40.13

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