Question

You are analyzing a large stable company. For the year ending 12/31/2015 the company reported earnings of $58,900 and book value at the end of 2015 was $371,700. You expect earnings to grow at 5% a year in perpetuity, and the dividend payout ratio of 70% to continue. The company borrows at 8%, and has a cost of equity of 12%. The company has 25,000 shares outstanding. What is your estimate of price per share using the dividend discount model at 12/31/2015

Answer 1

Answer:

$24.74

Explanation:

Total earnings for the year ending 12/31/2015= $58,900

dividend payout ratio=70%

current year total dividends= $58,900*70%

current year total dividends=$41,230.00

current dividend per share=current year total dividends/shares outstanding

current dividend per share=$41,230.00/25,000

current dividend per share=$1.6492

expected dividend=current dividend per share*(1+growth rate)

growth rate of dividends forever=5%

expected dividend=$1.6492*(1+5%)

expected dividend=$1.73166

share price=expected dividend/(cost of equity-growth rate)

cost of equity=12%

share price=$1.73166/(12%-5%)

share price=$24.74