Question

if a company has a current stock price of $50, an eps of $1.75/share; eps growth rate of 20% and the investors rate of return is 13%, calculate the cash cow price.

Answer 1

To calculate the cash cow price, we can use the dividend discount model (DDM) and the given information. However, the result of the calculation yields a negative price, which may require further analysis.

Step-by-step explanation:

To calculate the cash cow price, we can use the dividend discount model (DDM). The DDM calculates the present value of all future dividends and adds them up to get the price of the stock. The formula for the DDM is Price = Dividend / (Rate of Return - Growth Rate). In this case, the EPS can be considered as the dividend. So, using the given information: Stock price = $50, EPS = $1.75/share, EPS growth rate = 20%, Investor's rate of return = 13%. We can plug these values into the formula: Price = $1.75 / (0.13 - 0.20) = $1.75 / (-0.07) = -$25. Based on the formula, the cash cow price is -$25 per share. However, it is important to note that a negative price does not make sense in this context, so further analysis may be needed to understand any potential errors or discrepancies in the given information.