Question

ssignment: Chpater 11 0 X Assignment Score: 27.27% Save muestions Problem 11-12 (Calculation of g L and EPS) Submit Assignment for Grading Question 8 of 11 Check My Work eBook Calculation of g and EPS Spencer Supplies' stock is currently selling for $60 a share. The firm is expected to earn $5.40 per share this year and to pay a year-end dividend of $2.60. a. If investors require a 9% return, what rate of growth must be expected for Spencer? Round your answer to two decimal places. b. If Spencer reinvests earnings in projects with average returns equal to the stock's expected rate of return, then what will be next year's EPS? (Hint: OL - ROE x Retention ratio.) Do not round intermediate calculations. Round your answer to the nearest cent. Check My Work A 8:46 PM 03/25/20

Answer 1

a.

Using Constant Growth Model,

Stock Price = D1/(r - g)

60 = 2.60/(0.09 - g)

g = 4.67%

b.

EPS next year = 1.0467(5.40)= $5.65