Question

Rick’s Department Stores has had the following pattern of earnings per share over the last five years:  

Year	Earnings per share
20XU	$	14.00
20XV		14.70
20XW		15.44
20XX		16.21
20XY		17.02

The earnings per share have grown at a constant rate (on a rounded basis) and will continue to do so in the future. Dividends represent 40 percent of earnings.

  

a. Project earnings and dividends for the next year (20XZ). (Do not round intermediate calculations. Round the final answers to 2 decimal places.)

  

	20XZ
Earnings	$
Dividend	$

  

b. If the required rate of return is 13 percent, what is the anticipated share price at the beginning of 20XZ? (Do not round intermediate calculations. Round the final answer to 2 decimal places.)

  

Anticipated stock price           $

Answer 1

Req 1.
Earnings growith rate = (14.70-14) / 14 *100 = 5%
Project Earnings for next year
Earnings for last year		17.02
Add: Growth @5%		0.85
Earnings for next year	17.87
Dividend for next year:
Earnings for nxt year		17.87
Multiply: Dividend payout %	40%
Dividend for next year:	7.15
Req 2.
Stock price = Dividend of next year / (Required rate -Growth rate)
	7.15 / (13-5)% = 89.38
Stock price = $89.38