You have collected the following information about Arguello Corporation. • Current earnings are 2.00 per share....
You have collected the following information about Arguello
Corporation.
• Current earnings
are 2.00 per share. Earnings will grow 20% annually in stage 1.
Stage 1 lasts two years. Then, in stage 2, earnings will grow at 6%
forever.
• Dividends will be
30% of earnings in stage 1. In stage 2, because the company is
growing more slowly, dividends will be 60% of earnings.
• The required rate
of return is 12%.
What is the value per share of Arguello?
| A. |
$24.05 |
|
| B. |
$25.67 |
|
| C. |
$28.33 |
|
| D. |
$29.17 |
Homework Answers
Current Earnings = $2
E1 = $2 * (1.20) = $2.40
E2 = $2.40 * (1.20) = $2.88
Terminal value of earnings after year 2 = $2.88 * 1.06 / (0.12-0.06) = $50.88
D1 = $2.40 * 30% = $0.72
D2 = $2.88 * 30% = $0.864
Terminal value of Dividends = $50.88 * 60% = $30.528
Value per share = $0.72 * [1/(1 + 0.12)1] + $0.864 * [1/(1 + 0.12)2] + $30.528 * [1/(1 + 0.12)2]
Value per share = $25.67
Option 'B' is correct
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You have collected the following information about Arguello
Corporation.
• Current earnings
are 2.00 per share....
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