Question

Justin Cement Company has had the following pattern of earnings
per share over the last five years:

Year |
Earnings Per Share |
||

20X1 | $ | 7.00 | |

20X2 | 7.42 | ||

20X3 | 7.87 | ||

20X4 | 8.34 | ||

20X5 | 8.84 | ||

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 (20X6). **(Round the growth rate to the nearest whole
percent. Do not round any other intermediate calculations. Round
your answers to 2 decimal places.)**

**Earnings for 20X6 9.37**

**Dividend 3.75**

**How do I work part B.**

**b.** If the required rate of return
(*K _{e}*) is 13 percent, what is the anticipated
stock price (

Anticipated stock price?

Answer #1

Place yourself at beginning of 20X6. So, what they are asking is stock price today. Stock price under the constant dividend growth model is computed as follows -

P0 = D1 / (ke - g)

where, P0 = stock price today, D1 = expected dividend next year (20X6), Ke = required return, g = growth rate

growth rate = ($8.84 - $8.34) / $8.34 = 0.05995 or 6%

Expected dividend in 20X6 (D1) = Earnings next year x dividend payout ratio = $8.84 x (1 + 0.06) x 0.4 = $3.74816

P0 = $3.74816 / (0.13 - 0.06) = $53.54514 or **$53.55 (or
$53.54)**

Justin Cement Company has had the following pattern of earnings
per share over the last five years:
Year
Earnings
Per Share
20X1
$
12.00
20X2
12.60
20X3
13.23
20X4
13.89
20X5
14.58
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 (20X6). (Round the growth rate to the...

Justin Cement Company has had the following pattern of earnings
per share over the last five years:
Year
Earnings
Per Share
20X1
$
9.00
20X2
9.54
20X3
10.11
20X4
10.72
20X5
11.36
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 (20X6). (Round the growth rate to the...

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