Question

The absolute finance company are at five dollars a share last year and paid a dividend of two dollars per share. next year you expect the company to earn six dollars a share and continue its payout ratio assume that you expect to sell the stuff for $45 a year from now if you require a 13% return on the stock how much would you be willing to pay for it.

Answer 1

- Dividend payout last year = dividend per share last year/earnings per share last year

Dividend payout last year = $2/$5 = 40%

Dividend payout will remain same in the next year

Dividend in Next year = earning per share next year*Dividend payout last year

Dividend in Next year = $6*40%

Dividend in Next year(D1) = $2.4

Expected Price of Stock Next year(P1) = $45

Required Return(ke) = 13%

Calculating the Current price of Stock:-

P0 = $2.1239 + $39.8230

P0 = $41.95

So, the price you willing to pay for it is $41.95

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