Question

A firms most recent annual dividend was $1.50 per share. Over the next two years, the dividend is expected to grow at 12% per year, and then slow to a constant rate of 7% thereafter. If your required rate of return is 10% what is the value of the stock?

• $78.06
• $58.55
• $86.28
• $54.59
• None of the above

The Company has 100 million shares outstanding, paid an annual dividend of $0.25 per share to its common stockholders, and has a 40% marginal tax rate. The firm earned revenues of $800 million, had cash operating expenses of $300 million, paid interest expense of $15 million. What is the company's earnings per share?

• $3.00
• $2.91
• $1.10
• $1.40
• None of the above

Answer 1

1. Given D0=$1.5

D1=$1.5*(1+12%)=$1.68

D2=$1.68*(1+12%)=$1.88

D3=$1.88*(1+7%)=$2.01

Terminal value at year2=D3/(required rate-growth rate)=$2.01/(10%-7%)=$67.11

Value of the Stock=(D1/(1+10%))+((D2+Terminal value at Year2)/(1+10%)^2)

=(1.68/1.1)+(68.99/1.1^2)

=1.53+57.02

=$58.55 (Option B is correct)

2.Net profit before taxes=Revenue-Operating expenses-Interest expenses=$800-$300-$15=$485 million

Net profit=Net profit before taxes*(1-tax rate)=$485*(1-40%)=$291 million

Earnings per share=Net profit/outstanding shares=$291/100=$2.91 (option b is correct)