Question

Flex Co. just paid total dividends of $625,000 and reported additions to retained earnings of $1,875,000. The company has 535,000 shares of stock outstanding and a benchmark PE of 15.5 times. What stock price would you consider appropriate? πο29 Multiple Choice Ο Ο Ο Ο Ο

Answer 1

FLEX CO.
COMPUTATION OF STOCK PRICE
Dividends paid	$ 625,000.00	a
Additions to retained earnings	$            1,875,000.00	b
Total earnings	$            2,500,000.00	c = a + b
Number of shares of stock outstanding	535,000.00	d
Earnings per share	$ 4.673	e = c ÷ d
PE (Price Earning) multiple	15.50	f
Share price	$                          72.43	g = e × f

• PE multiple = Share price ÷ EPS
• ∴ Share price = EPS × PE multiple = $4.67 × 15.50 = $72.43

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Year	Dividend	PVF @ 10.4%	Disounted value
1	$           6.75	0.905797101	$               6.11
2	$         10.85	0.820468389	$               8.90
3	$         14.05	0.743177889	$            10.44
Current stock price			$            25.46

• Current stock price found using dividend discount model.
• Value of the stock is the present value of future earnings from the stock.