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 (

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

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$
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