Question

Joker stock has a sustainable growth rate of 11 percent, ROE of 17 percent, and dividends per share of $3.25. If the P/E ratio is 16.7, what is the value of a share of stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Stock value per share?

Answer 1

Step-1, Calculation of the Retention Ratio

Sustainable Growth Rate = ROE x Retention ratio

0.11 = 0.17 x Retention Ratio

Retention Ratio = 0.11 / 0.17

Retention ratio = 0.64705882 or 64.705882%

Step-2, Calculation of the Dividend Payout Ratio

Dividend Payout Ratio = 1 – Retention Ratio

= 1 – 0.64705882

= 0.35294118 or 35.294118%

Step-3, Calculation of the Earnings Per Share (EPS)

Dividend Payout Ratio = Dividend per share / Earnings Per Share

0.35294118 = $3.25 / Earnings Per Share

Earnings Per Share = $3.25 / 0.35294118

Earnings Per Share = $9.2083 per share

Step-4, Calculation of the Price of the Stock

The Value of a Stock = Earnings per share x P/E Ratio

= $9.2083 per share x 16.70 Times

= $153.78 per share

“Hence, the Stock value per share will be $153.78”