Yankees, Inc. (YANK) has current earnings per share of $1.96 and an expected earnings growth rate...

Yankees, Inc. (YANK) has current earnings per share of $1.96 and an expected earnings growth rate of 2.2%. The required return on the stock is 13% and the current book value per share is $12.70. Estimate the price of YANK using the Residual Income Model?

$16.31

$16.67

$15.96

$15.62

$15.07

Expert Solution

ROE = EPS / book price
=$1.96/12.70

=15.43%


Growth rate = retention ratio * ROE

2.2% = Retention ratio *15.433%

Retention ratio =14.255%

Payout ratio = 1-14.255%
=85.75%

Current dividend = $1.96*85.75%
=1.6807

Expected dividend = 1.6807*1.022
=$1.7177

Stock price = D1 / r - g

Where,
D1 = Expected Dividend
r= required rate of return
g= growth rate

=1.7177/0.13-0.022

=15.96

jeff jeffy answered 2 years ago

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