Company Z’s earnings and dividends per share are expected to grow by 3% per year for...

Company Z’s earnings and dividends per share are expected to grow by 3% per year for the next 4 years, then stop growing. In year 5 and after, it will pay out all earnings as dividends. Assume next year’s dividend is $3, the market capitalization rate is 10%, and next year’s EPS = $10. What is Company Z’s stock price?

Please explain answer and solution clearly

Expert Solution

Stock price = 86.79

Firstly calculate the earnings per share and dividend for the next 5 years. The Horizon value is calculated using the formula p4=D5/(k-g)

Then we calculate the net cash flows till Year 4. The stock price is calculated as the net present value of the cash flows discounted at 10%.

Year	EPS	Dividend	Horizon value	Net Cash flow
1	10.00	3.00		3.00
2	10.30	3.09		3.09
3	10.61	3.18		3.18
4	10.93	3.28	112.55	115.83
5	11.26	11.26

			Stock price	86.79

WORKINGS

jeff jeffy answered 1 day ago

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