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

Answer:

correct option is a) $66.68 per share

Explanation:

given data

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%

solution

we get here Market Price per share that is express as by P/E Ratio

P/E Ratio = Market Price per share ÷  Earnings per share   .............1

put here value and we get

20 = Market Price per share ÷ $4.50

Market Price per share = 20 × $4.50

Market Price per share = $90

and

earn 12% of return

so here discount all the expected dividend and market price to present value

use here an required rate of return as discount factor

present value of all amounts = $\frac{1}{(1+0.12)} +\frac{1.25}{(1+0.12)^2} +\frac{1.50}{(1+0.12)^3} +\frac{90}{(1+0.12)^3}$  

solve it we get

present value of all amounts = 66.7

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

so correct option is a) $66.68 per share