Question

# Justin Cement Company has had the following pattern of earnings per share over the last five...

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 nearest whole percent. Do not round any other intermediate calculations. Round your answers to 2 decimal places.)

b. If the required rate of return (Ke) is 13 percent, what is the anticipated stock price (P0) at the beginning of 20X6? (Round the growth rate to the nearest whole percent. Do not round any other intermediate calculations. Round your answer to 2 decimal places.)

(a)

 Year EPS Growth (in %) DPS (40% of EPS) 2011 12 (12 x 0.4) = \$ 4.8 2012 12.6 [(12.6 -12)/12] x100 = 5 (12.6 x 0.4) = \$ 5.04 2013 13.23 [(13.23 -12.6)/12.6] x 100 = 5 (13.23 x 0.4) = \$ 5.292 2014 13.89 [(13.89 - 13.23)/13.23] x 100 = 4.988 or 5 % (13.89 x 0.4) = \$ 5.556 2015 14.58 [(14.58 - 13.89)/13.89] x 100 = 4.967 or 5% (14.58 x 0.4) = \$ 5.832 2016 15.31 [(15.31-14.58)/14.58] x 100 = 5.006 or 5 % (15.31 x 0.4) = \$ 6.124

* DPS is Dividend Per Share and EPS is Earnings Per Share

(b) As the EPS and DPS figures given are the end of year figures, the 2016 EPS and DPS come in at the end of that year. Hence, stock price at beginning of 2016 or end of year 2015 would be the discounted value of 2016 DPS.

Required Rate of Return = K(e) =13 % and Growth Rate = g = 5 %

Therefore, P0 = 2016 DPS / (K(e) - g) = 15.31 / (0.13 - 0.05) = \$ 191.375

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