Question

6. Vaccine Development Corp (VDC) is expected to have EPS of $12.30 in Year 3 and to retain 85% of its earnings at the end of Year 3. If VDC has a 14% equity cost of capital and you expect its share price at the end of Year 3 to be $98, what would you be willing to pay for a share of stock at the beginning of Year 3? (round to the nearest cent)

Answer 1

Anwar Calculahon of Prul of stock at the beginning of years. Pnie Dividend in year 3 Ke - G where Ke : cost of capital 14%. lo browth rate = 9 Dividend in year $12.30* (1-0.84) $1.845 Step! Calculahon of Crowth rate leta. G. 0.14 Prie at the end of syear Dividend in Year 4 Ке $ 98 $1.8451174) 4. $98 (0.14-) $1.845 + $ 1.8454 $13.72 - $984 - $1.845 + $1.8454 $13-72 - $1.845 $1.8454 + $984 $11.875 = $99.845 4 ų 11.875 99.845 11.89%. Stefp.2 Calulahon of Price at the beginning of Year, Y. $1.845 $1.845 $87.44 3) 0.0211 014-0.1189 so Answer is $87.44