You are analyzing a large stable company. For the year ending 12/31/05 the company reported earnings of $58,900 and book value at the end of 2005 was $371,700. You expect earnings to grow at 5% a year in perpetuity, and the dividend payout ratio of 70% to continue. The company borrows at 8%, and has a cost of equity of 12%. The company has 25,000 shares outstanding. 1. What is your estimate of price per share using the dividend discount model at 12/31/05? a) $21.65 b) 20.62 c) $24.74 d) $23.56
You are analyzing a large stable company. For the year ending 12/31/05 the company reported earnings of $58,900 and book value at the end of 2005 was $371,700. You expect earnings to grow at 5% a year in perpetuity, and the dividend payout ratio of 70% to continue. The company borrows at 8%, and has a cost of equity of 12%. The company has 25,000 shares outstanding. 1. What is your estimate of price per share using the dividend discount model at 12/31/05? a) $21.65 b) 20.62 c) $24.74 d) $23.56
Chapter7: Common Stock: Characteristics, Valuation, And Issuance
Section: Chapter Questions
Problem 8P
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Question
You are analyzing a large stable company. For the year ending 12/31/05 the company reported earnings of $58,900 and book value at the end of 2005 was $371,700. You expect earnings to grow at 5% a year in perpetuity, and the dividend payout ratio of 70% to continue. The company borrows at 8%, and has a
1. What is your estimate of price per share using the
a) $21.65
b) 20.62
c) $24.74
d) $23.56
Expert Solution
Step 1
Dividend is payment by a company to its shareholders in return of their investments. Dividend can be in form of cash or kind . Dividend also helps in estimation of value of firm.
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