Question

Trend-Line Inc. has been growing at a rate of 6% per year and is expected to continue to do so indefinitely. The next dividend is expected to be $5 per share. a. If the market expects a 10% rate of return on Trend-Line, at what price must it be selling? (Do not round intermediate calculations.) b. If Trend-Line’s earnings per share will be $8 next year, what part of its value is due to assets in place? (Do not round intermediate calculations.) c. If Trend-Line’s earnings per share will be $8 next year, what part of its value is due to growth opportunities? (Do not round intermediate calculations.)

Answer 1

a. $125

b. $80

c. $45

Step-by-step explanation:

a. If the market expects a 10% rate of return on Trend-Line, at what price must it be selling? (Do not round intermediate calculations.)

Current selling price = Next dividend / (Rate of return - Growth rate) = $5 / (10% - 6%) = $125.

b. If Trend-Line’s earnings per share will be $8 next year, what part of its value is due to assets in place? (Do not round intermediate calculations.)

The value due to assets in place = Next year earning per share / Market rate of return = $8/10% = $80.

c. If Trend-Line’s earnings per share will be $8 next year, what part of its value is due to growth opportunities? (Do not round intermediate calculations.)

The value due to growth opportunities = Current selling price - The value due to assets in place = $125 - $80 = $45.