Question

ART has come out with a new and improved product. As a result, the firm projects an ROE of 24%, and it will maintain a plowback ratio of 0.15. Its earnings this year will be $2.0 per share. Investors expect a 11% rate of return on the stock. What price do you expect ART shares to sell for in 4 years?

Answer 1

$24.44

Step-by-step explanation:

The computation of the price sell for in four years is shown below:

But before that first determine the following calculations

Growth Rate is

= ROE × Plowback ratio

= 24% × 0.15

= 3.6%

Now

Dividend per share is

= EPS × (1 - Plowback Ratio)

= $2 × (1 - 0.15)

= $1.57

And, finally

Price of share is = Expected Dividend Next Year ÷ (Required Return - Growth Rate)

It can be rearrange like

Price in 4 years = Dividend Year 5 ÷ (Required Return – Growth Rate)

= 1.57 × (1.036)^4 ÷ (11% - 3.6%)

= $24.44