Question

You are considering the purchase of a stock that reported earnings per share of $2.68 in the most recent fiscal year. You expect the firm’s earnings to grow at 18% for the next ten years. After that you feel the growth in earnings will be 2.50% into the future. If you require a return of 15% on such an investment, what are you willing to pay for the shares today?

Answer 1

X fix B =+B238*1.025 C B239 .: A 228 229 D1 230 D2 231 D3 232 D4 233 D5 234 D6 235 D7 236 D8 237 D9 238 D10 239 D11 240 Stock price in 10 years $ 3.16 $ $ 3.73 $ 4.40 $ 5.20 6.13 $ 7.23 $ 8.54 10.07 $ 11.89 $ 14.03 $ 14.38 $ 115.02 14.38/(15%-2.5%) D PVIF @ 15% Present value 0.870 $ 2.75 0.756 $ 2.82 0.658 $ 2.90 0.572 $ 2.97 0.497 $ 3.05 0.432 $ 3.13 0.376 $ 3.21 0.327 $ 3.29 0.284 $ 3.38 0.247 $ 3.47 0.247 $ 28.43 241 242 Current share price $ 59.39

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