Nana Milk, a dairy product company, reported EPS of $2.40 in 2019, and paid dividends per...

Nana Milk, a dairy product company, reported EPS of $2.40 in 2019, and paid dividends per share of $1.06. The earnings and dividends had grown 7.5% a year over the prior five years, and were expected to grow 6% a year in the long term (starting in 2020). The stock’s required return is 12.775%, and the actual P/E ratio is currently 10.

a) Estimate the fair P/E ratio for Nana Milk.
b) What long-term growth rate is implied in the firm’s current P/E ratio?

Expert Solution

a) Fair P/E ratio

Required Rate of return	12.78%
Growth rate	6%
Dividend	1.06
Price of share	15.64576	=Dividend of previous Year/(Required rate of return-Long term excpected rate of return)
EPS	2.4
PE Ratio	6.519065	=Price of share/EPS

b).

FOrmula and COncept would be same that We use gordon growth formula to calculate the price of share and divide it by EPD to get the PE ratio. In second part, we are give EPS and we are expected to calculate Growth Rate. This like reverse calculation.

Required Rate of return	12.78%
Given PE ratio	10
EPS	2.4
Implied Price	24	=PE ratio * EPS
Long Term growth rate Implied	8.36%	=required rate of return- (Dividend/Implied Price)

jeff jeffy answered 2 years ago

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