HomeworkLib
Question

Question 4: Consider the value of company ALPHAFARM earning $10.00 in earnings per share (EPS) and...

Question 4:
Consider the value of company ALPHAFARM earning $10.00 in earnings per share (EPS) and currently paying $5 in dividends per share (DPS) per annum with earnings and dividends both expected to grow indefinitely at 3% per annum and discounted at 12% (i.e. a risk-free rate of 5% plus an equity risk premium of 7%).

Calculate the value of APLHAFARM shares based on a dividend discount model (DDM) in perpetuity assuming constant growth rates indefinitely. (value to the nearest whole number)

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

current dividend (D0)=   5  
Growth rate = 3% or   0.03  
required Return (ke)=   12% or   0.12


Price formula as per Dividend discount model in perpetuity = D0*(1+g)/(ke - g)      
5*(1+0.03)/(0.12-0.03)      
5.15   /   0.09
57.22222222      
So, stock price is    $57  

Please thumbs up
      

0 0
Add a comment
Know the answer?
Add Answer to:
Question 4: Consider the value of company ALPHAFARM earning $10.00 in earnings per share (EPS) and...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • 3) IBM's stock is currently trading at $133 per share. The EPS for 2018 was $15.00 and the dividend was $5.00 The b...

    3) IBM's stock is currently trading at $133 per share. The EPS for 2018 was $15.00 and the dividend was $5.00 The beta of IBM is 1.2 The risk-free rate is 2% and the market risk premium is 7% 1) What is the intrinsic value of the stock if you forecast the company to grow at 20% for the next 2 years, then 5% thereafter, assuming that the payout ratio remains constant at current levels? 2) What is the intrinsic...

  • 2) If a company has earnings per share (EPS) of $10.00 and it pays out $4.00...

    2) If a company has earnings per share (EPS) of $10.00 and it pays out $4.00 a share in dividends (DPS = 4.00); what is it's payout ratio? What is it's retention rate?

  • 10. Company Z's earnings and dividends per share are expected to grow indefinitely by 5% a...

    10. Company Z's earnings and dividends per share are expected to grow indefinitely by 5% a year. If next year's dividend is $10 and the market capitalization rate is 8%. If company Z were to distribute all its earnings, it could maintain a level dividend stream of $15 a share(EPS-15) How much is the market actually paying per share for growth opportunities? (a) $122.90 (b) $137.55 (c) $145.83 (d) $157.44

  • Company Z's earnings and dividends per share are expected to grow indefinitely by 3% a year....

    Company Z's earnings and dividends per share are expected to grow indefinitely by 3% a year. Assume next year's dividend per share is $19 and next year's EPS is $4. The market capitalization rate is 11%. If Company Z were to distribute all of its earnings, it could maintain a level dividend stream of $4 a share. How much is the market actually paying per share for growth opportunities?

  •  Company just reported Earning Per Share of $50.00 (EPS0=$50)  Management plans to continue to...

     Company just reported Earning Per Share of $50.00 (EPS0=$50)  Management plans to continue to payout 20% of net income in the form of dividends  Before implementing any cost cutting initiatives, management expects earnings will continue to grow at a long term sustainable growth rate of10.0% every year in perpetuity  The company’s cost of equity is 25% Through cost savings, Company’s management has a plan to increase ROE by 2.5%. Note this will also cause the earnings...

  •  Company just reported Earning Per Share of $50.00 (EPS0=$50)  Management plans to continue to...

     Company just reported Earning Per Share of $50.00 (EPS0=$50)  Management plans to continue to payout 20% of net income in the form of dividends  Before implementing any cost cutting initiatives, management expects earnings will continue to grow at a long term sustainable growth rate of10.0% every year in perpetuity  The company’s cost of equity is 25% Assume Management does not attempt to cut costs and use the 10% earnings growth rate. Using the Dividend Discount Model...

  • Company's Z's earnings and dividends per share are expected to grow indefinitely by 3% a year....

    Company's Z's earnings and dividends per share are expected to grow indefinitely by 3% a year. Assume next year's dividend per share is $2 and next year's EPS is $3. The market capitalization rate is 9%. If Company Z were to distribute all of its earnings, it could maintain a level dividend stream of $3 a share. How much is the market actually paying per share for growth opportunities? (Do not round intermediate calculations. Negative amount should be indicated by...

  • 2. Consider the following data on the company Thor. SPS = Sales per share 5.70 EPS...

    2. Consider the following data on the company Thor. SPS = Sales per share 5.70 EPS = Earnings per share 2.75 DPS = Dividends per share 1.25 (this is last year dividend or D0 ) BV = Book value per share 5.10 NPM = Net profit margin 7.2% ROE = Return on equity 18.5% MP = Market price per share 26.29 Normal growth in EPS of 3.5%. Super growth rate of 8.5% for 12 years. 2A. Calculate Current Price to...

  • Questions 4-6 4. Firm Y currently pays a dividend of $1.22, which is expected to grow...

    Questions 4-6 4. Firm Y currently pays a dividend of $1.22, which is expected to grow indefinitely at 5%. If the current value of the firm's shares based on constant-growth DDM is $32.03, what is the required rate of return? 5. MM Corp, has an ROE of 16% and a plowback ratio of 50%. If the coming year's earnings are expected to be s per share, at what price will the stock sell? The market capitalization rate is 12%. 6....

  • The FI Corporation’s dividends per share are expected to grow indefinitely by 8% per year. a....

    The FI Corporation’s dividends per share are expected to grow indefinitely by 8% per year. a. If this year’s year-end dividend is $4.00 and the market capitalization rate is 10% per year, what must the current stock price be according to the DDM? b. If the expected earnings per share are $16.00, what is the implied value of the ROE on future investment opportunities? (Round your answer to 2 decimal places.) c. How much is the market paying per share...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT