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Homework answers / question archive / Based on analysis, the company is expected to make $4
Based on analysis, the company is expected to make $4.80 per share from the common stock next year. The company has a policy to consistently pay out 50% of earnings as dividends. Investors holding the shares expect to earn 12% and expect a dividend growth rate of 9%.
a) Expected dividend = Expected EPS of next year x Dividend payout ratio
= 4.80 x 50%
= 2.4$
Price per share today = Expected dividend/Required rate of return-growth rate
Required rate of return = 12%
growth rate = 9%
= 2.4/12%-9%
= 2.4/3%
= 80$
b) PE ratio = Market price per share/Earnings per share
We have expected Earnings per share which we knew grew by 9%
Thus Expected EPS = EPS of today(1+9%)
4.8 = EPS of today(1.09)
EPS of today = 4.40 $
Thus PE ratio = 80/4.40
= 18.17
