Question

Sarif Industries is currently at a share price of $29 and reinvests 23% of its earnings each year. With the company's dividends expected to grow at an annual rate of 3.6% in perpetuity and investors requiring a rate of return on their investment of 11.4%, what is Sarif's 1 year forward earning per share, using Constant Growth Dividend Model?

a. 3.05
b. 2.94
c. 9.87
d. 10.23
e. 2.26

Answer 1

To calculate the 1-year forward earnings per share using the Constant Growth Dividend Model, we need to determine the dividend per share for the next year. We can calculate the dividend per share by multiplying the current dividend by 1 plus the growth rate. Finally, the 1-year forward earnings per share is found by subtracting the dividend per share from the share price.

Step-by-step explanation:

To calculate the 1-year forward earnings per share using the Constant Growth Dividend Model, we first need to determine the dividend per share for the next year. The formula for calculating the dividend per share is:

Dividend per Share = Current Dividend * (1 + Growth Rate)

Given that Sarif Industries reinvests 23% of its earnings and dividends are expected to grow at an annual rate of 3.6% in perpetuity, we can calculate the dividend per share:

Dividend per Share = $29 * 0.23 * (1 + 0.036)

Dividend per Share = $4.003

Finally, we can calculate the 1-year forward earnings per share by subtracting the dividend per share from the share price:

1-year Forward Earnings per Share = Share Price - Dividend per Share

1-year Forward Earnings per Share = $29 - $4.003

1-year Forward Earnings per Share = $24.997