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Bruin Inc. has recently announced a $2.2 EPS. Earnings are expected to grow at 5 percent...

Bruin Inc. has recently announced a $2.2 EPS. Earnings are expected to grow at 5 percent per year forever. The company will not pay dividends on the stock over the next 6 years.

However, it will pay 30% of its earnings as dividend starting in year 7. The payout ratio will remain at 30% forever. Earnings will continue to grow at the same 5% rate.

If the required rate of return on this stock is 15 percent, what is the current share price according to the dividend growth model?

Select one:

a. 2.01

b. 0.35

c. 4.01

d. 3.49

e. 0.40

Solutions

Expert Solution

15.0000%
Cash flows Year Discounted CF
                           -   0 0.00
                           -   1 0.00
                           -   2 0.00
                           -   3 0.00
                           -   4 0.00
                           -   5 0.00
                      9.29 6 4.01

terminal value = 2.2*0.3*1.057 = 9.29

price = 9.29/1.05^6 = 4.01

jeff jeffy answered 2 years ago
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