Answer:
EPS = $2.40 per share
Pay-out ratio = 2 / 3
Growth rate = 5%
Price of a stock (P0) = $24
Explanation:
Earning per share can be calculated by dividing the total net income a company in the total number of shares the company has issued. After finding EPS we can calculatate payout ratio easily by dividing dividends per share in Earning per share.
DATA
Net income = 24m
No of shares = 10m
RIR = 15%
Ke = 12%
a)
EPS = Net Income / No. of share outstanding
EPS = $24,000,000 / 10,000,000 shares
EPS = $2.40 per share
Pay-out ratio = Dividend per share / Earning per share
Pay-out ratio = $1.60 / $2.40
Pay-out ratio = 2 / 3
b)
Growth rate = (1 - payout ratio) x RIR
Growth rate= (1 - 2/3) x 15%
Growth rate = 5%
Price of a stock (P0) = D0 x (1 + g) / (Ke - g)
Where do KE = cost of capital , g = growth
Price of a stock (P0) = $1.60 x (1 + 0.05) / (0.12 - 0.05)
Price of a stock (P0) = $1.68 / 0.07
Price of a stock (P0) = $24
c) If the payout ratio was 1/3,
Growth rate = (1 - 1/3) x 15%
Growth rate = 2/3 x 15%
Growth rate = 10%
Dividend per share (D0) = $2.4 x 1/3
Dividend per share (D0) = $0.80 per share
P0 = $0.80 x (1 + 0.10) / (0.12 - 0.10)
P0= $0.88 / 0.02
P0= $44
