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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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CALCULATION OF g AND EPS Sidman Products’s common stock currently sells for $60.00 a share. The firm is expected to earn $5.40 per share this year and to pay a year-end dividend of $3.60, and it finances only with common equity.

  1. a. If investors require a 9% return, what is the expected growth rate?
  2. b. If Sidman reinvests retained earnings in projects whose average return is equal to the stock’s expected rate of return, what will be next year's EPS? (Hint: Refer to Equation 9.4 in Chapter 9.)

a.

Summary Introduction

To calculate: The expected growth rate.

Introduction:

Cost of Equity:

It is the cost of the company while raising finance by issuing equity. It is the earnings from the investment to the firm’s equity investors. It is the return to the shareholders equity investments.

Explanation

Given information:

Dividend to be paid is $3.60.

Current stock price is $60.

Cost of common equity is 9%.

The formula to calculate the cost of common equity is,

r=D1P0+g

Where

  • r is the cost of common equity.
  • D1 is the next expected dividend.
  • P0 is the current price of the stock

b.

Summary Introduction

To calculate: The next year’s EPS (earnings per share), if the retained earnings are reinvested in the project whose average return is equal to the stock’s expected rate of return.

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