Bobs Group, a firm that specializes in the design and manufacturing of aircraft components, has 150 million shares outstanding and analysts expect Bobs to have earnings of $450 million this coming year (t=1). Bobs plans to pay out 55% of its earnings in dividends and they expect to use an additional 15% of their earnings to repurchase shares. Bob's equity cost of capital is 11%. Its earnings are expected to grow at a rate of 3% per year and these payout rates are expected to remain constant. What is the value of one share of Bob's stock today?
a. $26.25 b. $20.63 c. $5.63 d. $2.10 e. $37.50 f. None of the above answers is within $0.25 of the value of one NORDAM share.
The expected earnings of Bobs to this coming year (t=1) =$450 million
Expected Dividend payout = 55% of the expected earnings
= 55% *$450 million
= $247.50 million
Therefore expected dividend per share, D1 = expected Dividend payout/ number of shares outstanding
Where, number of shares outstanding = 150 million
Therefore,
Therefore expected dividend per share, D1 = $247.50 million/ 150 million
= $1.65 per share
Now,
The value of one share of Bob's stock today, P0 = D1/ (k – g)
Where
P0 = the current stock price =?
D1 = dividend for next year = $ 1.65 per share
k = required rate of return or equity cost of capita = 11%
g = growth rate of dividends (constant) = 3%
Therefore
The value of one share of Bob's stock today, P0 = $ 1.65 / (0.11 – 0.03) = $20.625 or $20.63
Therefore correct answer is option b. $20.63
Bobs Group, a firm that specializes in the design and manufacturing of aircraft components, has 150...
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