Question

A Company is expected to earn $19.84 million next year. There are 3.2 million shares outstanding and the company uses a dividend payout ratio of 40 percent. The required rate of return for companies like Blue is 9 percent. The current share price of Blue is $75.

What are the expected earnings per share?

What are the expected dividends per share?

What is the dividend growth rate expected ?

What is the present value of growth opportunities for this firm?

Answer 1

Answer a.

Expected earnings = $19,840,000
Number of shares outstanding = 3,200,000

Expected earnings per share = Expected earnings / Number of shares outstanding
Expected earnings per share = $19,840,000 / 3,200,000
Expected earnings per share = $6.20

Answer b.

Payout ratio = 40%

Expected dividends per share = Expected earnings per share * Payout ratio
Expected dividends per share = $6.20 * 0.40
Expected dividends per share = $2.48

Answer c.

Retention ratio = 1 - Payout ratio
Retention ratio = 1 - 0.40
Retention ratio = 0.60

Required return = Expected dividends per share / Current price + Growth rate
0.09 = $2.48 / $75.00 + Growth rate
0.09 = 0.0331 + Growth rate
Growth rate = 0.0569 or 5.69%

Answer d.

Stock price without growth = Expected earnings per share / Required return
Stock price without growth = $6.20 / 0.09
Stock price without growth = $68.89

Present value of growth opportunities = Current price - Stock price without growth
Present value of growth opportunities = $75.00 - $68.89
Present value of growth opportunities = $6.11