Question

Rick’s Department Stores has had the following pattern of earnings per share over the last five years:  

Year	Earnings per share
20XU	$	15.00
20XV		15.90
20XW		16.85
20XX		17.86
20XY		18.93

The earnings per share have grown at a constant rate (on a rounded basis) and will continue to do so in the future. Dividends represent 40 percent of earnings.

  

a. Project earnings and dividends for the next year (20XZ). (Do not round intermediate calculations. Round the final answers to 2 decimal places.)

  

	20XZ
Earnings	$
Dividend	$

  

b. If the required rate of return is 13 percent, what is the anticipated share price at the beginning of 20XZ? (Do not round intermediate calculations. Round the final answer to 2 decimal places.)

  

Anticipated stock price           $

Answer 1

first let us know the growth rate in earnings:

growth rate = (next year earnings - current year earnings) / current year earnings *100

for year 20xu to 20xv	(15.90-15)/15.00*100=>6%
20xv to 20xw	(16.85-15.90)/15.90 *100 =>5.97% rounded to 6%
20xw to 20xx	(17.86-16.85)/16.85*100=>5.99%=>6%
20xx to 20xy	(18.93-17.86)/17.86*100=>5.99%=>6%

since growth rate across the periods is 6% (approximately)

The same shall be assumed to continue in the future.

so earning for 20xz = (20xy earnings) + 6%

=>18.93+6%

=>$20.07

dividend will be 40% of earnings

=>$20.07 * 40% =>$8.03.are the dividends for 20xz

earnings	$20.07
dividends	8.03

b.stock price = dividend to be paid / (required rate of return - growth rate)

=>$8.03 / (0.13-0.06)

=>$114.71.