Question

Laurel Enterprises expects earnings next year of ​$3.68 per share and has a 30 % retention​ rate, which it plans to keep constant. Its equity cost of capital is 9 %​, which is also its expected return on new investment. Its earnings are expected to grow forever at a rate of 2.7 % per year. If its next dividend is due in one​ year, what do you estimate the​ firm's current stock price to​ be?

Answer 1

Answer:

So the firm's current stock price will be $40.88

Explanation:

We have given that Enterprises expected earnings next year is $3.68

So EPS next year = $3.68

Retention rate is given as 40%

Dividend payout ratio = 100 - 40 = 60 %

Dividend paid next year = $3.68×0.6 = $2.208

We know that price of the stock = $\frac{D_1}{Ke-G}=\frac{2.208}{0.09-0.036}=40.88$

So the firm's current stock price will be $40.88