Question

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

     
        
b. If the required rate of return (K_e) 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.)
  

Answer 1

Requirement (a) - Project earnings and dividends for the next year (20X6)

Growth Rate Calculation

20X1 - 20X2 = 6% [($9.54 – 9.00) / $9.00] x 100

20X2 - 20X3 = 6% [($10.11 - $9.54) / $9.54] x 100

20X3 - 20X4 = 6% [($10.72 - $10.11) / $10.11] x 100

20X4 - 20X5 = 6% [($11.36 - $10.72) / $10.72] x 100

Project Earnings for the next year

Project Earnings for the next year = EPS for 20X5 x (1 + Growth Rate)

= $11.36 x (1 + 0.06)

= $11.36 x 1.06

= $12.04

Dividend for the next year

Dividend for the next year = Project Earnings for the next year x Dividend Payout Ratio

= $12.04 x 40%

= $4.82

Requirement (b) - The anticipated stock price (P0) at the beginning of 20X6

Stock Price (P0) = D1 / (Ke – g)

= $4.82 / (0.13 – 0.06)

= $4.82 / 0.07

= $68.81