Question

Laurel Enterprises expects earnings next year of ​$ per share and has a retention​ rate, which it plans to keep constant. Its equity cost of capital is ​, which is also its expected return on new investment. Its earnings are expected to grow forever at a rate of 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

Answer: $49.26

Step-by-step explanation:

Using the Gordon Growth model, the price of stock should be:

= Next divided / (Cost of equity - growth rate)

Next dividend = Earnings per share * (1 - Retention rate)

= 4.44 * ( 1 - 40%)

= $2.66

Price of stock:

= 2.66 / (9% - 3.6%)

= $49.26