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Laurel Enterprises expects earnings next year of ​$4.06 per share and has a 40 % retention​ rate, which it plans to keep constant. Its equity cost of capital is 9 %​, which is also its expected return on new investment. Its earnings are expected to grow forever at a rate of 3.6 % per year. If its next dividend is due in one​ year, what do you estimate the​ firm's current stock price to​ be?

Respuesta :

Answer:

Current price of stock is $39.44

Explanation:

Data provided in the question:

Enterprises expects earnings next year = ​$4.06 per share

Retention ratio = 40% = 0.4

Dividend payout ratio = 1 - Retention ratio = 1 - 0.4 = 0.6

Equity cost of capital = 9% = 0.09

Expected growth rate = 3.6% = 0.036

Now,

Dividend paid next year

= Enterprises expects earnings × Dividend payout ratio

= $3.55 × 0.60

= $2.13

Price of the stock = [tex]\frac{\textup{Dividend paid}}{\textup{Equity cost of capital - growth rate}}[/tex]

or

Price of the stock = [tex]\frac{\$\textup{2.13}}{\textup{0.09 - 0.036}}[/tex]

or

Price of the stock = $39.44

Hence,

Current price of stock is $39.44

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