Question

14) (6 pts) ABC company current stock price is $50. The most recent Earnings per Share reported was $3.00 (assume this EPS number was just reported yesterday). You expect the company's Earnings to increase by 10% next year and 6% the following year. In two years you are expecting the company's stock will trade at a P/E multiple of 22. Your required rate of return for ABC is 10%. If you expect the company to maintain a 30% dividend payout ratio, fill in the following information used to estimate the intrinsic value (you do not have to estimate the intrinsic value just fill in the blanks below) Yr. 1 EPS = Yr 2 EPS = Yr. 1 Div = Yr. 2 Div = Yr 2 Horizon Value =

Answer 1

EPS 0=	3
Growth Rate for First year =	10%
Growth rate for subsequent year=	6%
EPS for year1 =	3*110%
	3.3
EPS for year2 =	EPS 1*106%
	3.3*106%
	3.50
Divident Pay out Ratio =	30%
Hence
Dividend for year1 =	3.3*30%
	0.99
Dividend for year2 =	3.5*30%
	1.05
Required rate of return for ABC is =	10%
value in year 2 =		Dividend 2*(1+g) / (Ke-g)
	=	1.05* 1.06) / (10%-6%)
		$ 27.825