Question

Erna Company is expected to pay a dividend of $2.69 one year from today and $2.84 two years from today. The company's sales in two years are expected to be $16,150,000. The company has a PS ratio of 1.87 times, and 528,500 shares outstanding. If the required return on the company's stock is 11.8 percent, what is the current stock price?

Answer 1

B.$50.40.

working:

first let us calculate stock price after 3 years :

PS ratio = 1.87 times.

PS ratio = stock price per share / revenue per share

here,

stock price is to be known

revenue per share = $16,150,000/528,500 shares

=>$30.5581835

now,

stock price per share = $30.5581835 * 1.87

=>$57.1438031.

now,

current stock price:

year	cash flow	present value factor @11.8%	cash flow * present value factor
1	2.69	1/(1.118)^1=>0.89445438	(2.69*0.89445438)=>2.40608228
2	2.84	1/(1.118)^2=>0.80004864	(2.84*0.80004864)=>2.27213814
2	57.1438031 (stock price as above)	1/(1.118)^2=>0.80004864	(57.1438031*0.80004864)=>45.717822
		Total	$50.40