Question

New Age Electronics expects to earn $100,000 this year. Earnings will grow 3% indefinitely if the firm makes no new investments. The firm’s discount rate is 10%, and 250,000 shares are outstanding. What is the price per share of stock (to two decimals) without the new line, assuming that all of the earnings are paid out as dividends? Do not use dollar sign.

Answer 1

Answer:

5.89

Explanation:

since the company distributes all of its earnings as dividends, the current dividends = $100,000 / 250,00 shares = $0.40

to determine the stock price assuming that the growth rate is 3% indefinitely:

stock price = [dividend x (1 + growth rate)] / (required rate of return - growth rate)

stock price = [$0.40 x (1 + 3%)] / (10% - 3%) = $0.412 / 7% = $5.89

The growing perpetuity formula or Gordon growth model is used to determine the intrinsic price of a stock using the future cash flows or dividends.

Answer 2

Answer:

5.7 1

Explanation:

Given:

• Earning expect: $100,000
• Grow rate: 3% = 0.03 (g)
• Discount rate: 10% = 0.1 (r)
• Number of shares: 250,000

We need to find the EPS because all of the earnings are paid out as dividends

= $100,000/250,000 shares

= $0.4

=> Current price:

P = D1 / (r-g)

<=> P = 0.4 (0.1 - 0.03) = 5.7 1

So the price per share of stock is  5.7 1

Hope it will find you well