Question

Laurel Enterprises expects earnings next year of ​$3.68 per share and has a 30 % retention​ rate, which it plans to keep constant. Its equity cost of capital is 9 %​, which is also its expected return on new investment. Its earnings are expected to grow forever at a rate of 2.7 % per year. If its next dividend is due in one​ year, what do you estimate the​ firm's current stock price to​ be?

Answer 1

So the firm's current stock price will be $40.88

Step-by-step explanation:

We have given that Enterprises expected earnings next year is $3.68

So EPS next year = $3.68

Retention rate is given as 40%

Dividend payout ratio = 100 - 40 = 60 %

Dividend paid next year = $3.68×0.6 = $2.208

We know that price of the stock =
`(D_1)/(Ke-G)=(2.208)/(0.09-0.036)=40.88`

So the firm's current stock price will be $40.88