Question

FGF Company just reported EPS of $1.96. Current book value of the company is $7.25. The discount rate for this company is 10.7%.

Calculate the share price for the company if the growth rate is 3.85%. If the share price is instead $29.60, what would the growth rate need to change to in order to derive that value?

Answer 1

(a)

Book Value = $ 7.25, Current EPS = $ 1.96 and Perpetual growth rate = 3.85 %

Discount Rate = 10.7 %

Current Market Price = Book Value + [Current EPS x (1+Growth Rate)] / [Discount Rate - Growth Rate] = [1.96 x 1.0385] / [ 0.107 - 0.0385] = $ 29.715

(b) If the market price is $ 29.6 then let the required growth rate be G

Therefore, 29.6 = 7.25 + [1,96 x (1+G)] / (0.107 - G)

22.35 x (0.107 - G) = 1.96 + 1.96 G

2.39145 - 22.35 G = 1.96 + 1.96 G

0.43145 = 24.31 G

G = (0.43145 / 24.31) = 0.0177478 or 1.77478 % ~ 1.77 %