Question

Early in 2015, Mathew is analyzing shares of Janeff Corp. He expects the following dividends per share (end of year). 1. 2015: $1.00 2. 2016: $1.25 3. 2017: $1.50 He expects 2017 earnings per share to be $4.50 and Janeff's P/E ratio to be 20. His required rate of return for this stock is 12%. He should pay no more than:______.a) $66.68 per share. b) $71.17 per share.c) $93.75 per share.d) $76.15 per share.

Answer 1

He should pay no more than $66.68 per share

Explanation:

Given ,

1. 2015: $1.00

2. 2016: $1.25

3. 2017: $1.50

Earnings per share = $4.50

P/E ratio = 20

Required rate of return = 12%

Stock price per share expressed according to P / E ratio

P/E Ratio = Market Price per share ÷  Earnings per share  

20 = Market Price per share ÷ $4.50

Market Price per share = 20 × $4.50

Market Price per share = $90

Earn 12% of return

So here you discount to present value all the planned dividend and market price. use as discount factor here a necessary rate of return

present value of all amounts = 66.7

So, maximum amount that is paid to earn 12% return is $66.7