Question

LeBlanc Inc. currently has earnings of $10 per share, and investors expect that the earnings per share will grow by 3 percent per year. Furthermore, the mean PE ratio of all other firms in the same industry as LeBlanc Inc. is 15. LeBlanc is expected to pay a dividend of $3 per share over the next four years, and an investor in LeBlanc requires a return of 12 percent. What is the forecasted stock price of LeBlanc in four years, using the adjusted dividend discount model?

Answer 1

Answer:

Stock Price of LeBlanc in four years = $37.517

Explanation:

Dividend Discount model is as follows:

$P_4 = \frac{D_5}{K_e - g}$

Where,

$P_4$ = Price of share at end of four years

$D_5$ = Dividend to be paid at end of 5th year

$K_e$ = return on equity or cost of equity

g = growth rate

Now we have the information as follows:

Dividend at 5th year end = ((($3 per share + 3%) + 3%) + 3%) +3% = 3.765

Cost/ Return on equity = 12%

Growth rate = 3%

Therefore price = $\frac{3.3765}{0.12 - 0.03}$

= $\frac{3.3765}{0.09}$

Stock Price of LeBlanc in four years

= $37.517