Sample Corp had earnings per share last year of $2.82. Current book value is $7.58. Discount...
Sample Corp had earnings per share last year of $2.82. Current book value is $7.58. Discount rate is 9.6%. Calculate the share price for Sample Corp if the firm is expected to grow at 4.2% into the foreseeable future.
How much does the price change if next year's earnings are expected to grow by 10.6%, then grow by 4.2% thereafter?
Homework Answers
| Current earning per share | $ 2.82 | ||||||
| Rate of return | 9.60% | ||||||
| Growth Rate | 4.20% | ||||||
| Share price | =Current earning per share*(1+Growth rate)/(Rate of return-Growth Rate) | ||||||
| Share price | '2.82*(1+4.2%)/(9.6%-4.2%) | ||||||
| Share price | 54.415 | ||||||
| If next year dividend grow by 10.6% | |||||||
| Next year dividend | 2.82*(1+10.6%) | ||||||
| Next year dividend | $ 3.12 | ||||||
| Share price after 1 year | |||||||
| Current earning per share | $ 3.12 | ||||||
| Rate of return | 9.60% | ||||||
| Growth Rate | 4.20% | ||||||
| Share price | =Current earning per share*(1+Growth rate)/(Rate of return-Growth Rate) | ||||||
| Share price | '3.1189*(1+4.2%)/(9.6%-4.2%) | ||||||
| Share price | $ 60.18 | ||||||
| So the current share price will be the present value of next year dividend and next year share price | |||||||
| Dividend-T1 | $ 3.12 | ||||||
| Share price -T1 | $ 60.18 | ||||||
| Total | $ 63.30 | ||||||
| Share price today= | 63.30/(1+9.6%) | ||||||
| Share price today= | $ 57.76 | ||||||
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