To calculate the price of Warehouse Incorporated's shares in 4 years, we can use the Gordon Growth Model formula. Given the earnings per share and the plowback ratio, we can calculate the growth rate of dividends. Plugging these values into the formula, we find that the expected price of shares is $11.43 in 4 years.
To determine the price that investors would pay for a share of stock in Warehouse Incorporated in 4 years, we can use the Gordon Growth Model formula: P0 = D1 / (r - g). Where:
- P0 represents the price of the stock at time 0
- D1 represents the expected dividends per share at time 1
- r represents the rate of return that investors expect
- g represents the growth rate of dividends
In this case, we are given that the earnings per share this year is $4.0. The plowback ratio is 0.20, which means that 80% of the earnings will be paid out as dividends. Therefore, the dividends per share at time 1 will be $4.0 x 0.20 = $0.8. Using a rate of return of 12% and a plowback ratio of 0.20, we can calculate the growth rate of dividends as: g = ROE x plowback ratio = 25% x 0.20 = 5%. Plugging these values into the formula, we have:
P0 = $0.8 / (0.12 - 0.05) = $0.8 / 0.07 = $11.43
Therefore, the price of Warehouse Incorporated's shares is expected to be $11.43 in 4 years.