Question

Joker stock has a sustainable growth rate of 9 percent, ROE of 17 percent, and dividends...

Joker stock has a sustainable growth rate of 9 percent, ROE of 17 percent, and dividends per share of $1.55. If the P/E ratio is 15.5, what is the value of a share of stock? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Share of stock $________

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Homework Answers

Answer #1

Step-1, Calculation of the Retention Ratio

Sustainable Growth Rate = ROE x Retention ratio

0.09 = 0.17 x Retention Ratio

Retention Ratio = 0.09 / 0.17

Retention ratio = 0.5294 or 52.94%

Step-2, Calculation of the Dividend Payout Ratio

Dividend Payout Ratio = 1 – Retention Ratio

= 1 – 0.5294

= 0.4706 or 47.06%

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

Dividend Payout Ratio = Dividend per share / Earnings Per Share

0.4706 = $1.55 / Earnings Per Share

Earnings Per Share = $1.55 / 0.4706

Earnings Per Share = $3.2937 per share

Step-4, Calculation of the Price of the Stock

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

= $3.2937 per share x 15.5 Times

= $51.05 per share

“Hence, the Value of a Stock would be $51.05”

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