Question

Erna Company is expected to pay a dividend of $2.37 one year from today and $2.52 two years from today. The company's sales in two years are expected to be $15,350,000. The company has a PS ratio of 1.55 times, and 520,500 shares outstanding. If the required return on the company's stock is 10.2 percent, what is the current stock price?

Multiple Choice

• $5.37

• $41.87

• $4.23

• $37.64

• $43.54

Answer 1

Answer is $41.87

Year 1:

Dividend, D1 = $2.37

Year 2:

Dividend, D2 = $2.52

Sales per unit = Sales / Number of Shares Outstanding
Sales per unit = $15,350,000 / 520,500
Sales per unit = $29.49087

PS Ratio = Price per unit / Sales per unit
1.55 = Price per unit / $29.49087
Price per unit = $45.710855

Required Return = 10.20%

Current Stock Price = $2.37/1.1020 + $2.52/1.1020^2 + $45.710855/1.1020^2
Current Stock Price = $41.87