Question

It is February 2016. Whole Foods Market, Inc. just made an annual earnings announcement of $1.62 per share and is expected to increase that amount by 4 percent per year indefinitely. At the end of each year, the company is also expected to pay off 50% of its earnings as dividends and share repurchases. The most recent payment has just been made. If you are planning to buy 1,000 shares of this stock now, how much should you expect to pay per share if the market rate of return for this type of security is 7 percent at the time of your purchase?

Answer 1

You should expect to pay per share = 28.08

Explanation:

information given:-

EPS0 = 1.62

Payout ratio = 50%

Growth rate =4%

Market rate of return = 7%

Step 1:- Calculation of D0

D0 = EPS0 x Payout ratio

D0 = 1.62 *50%

D0 = 0.81

Step 2: - calculation of D1

D1 = D0 * (1+ growth rate)

D1 = .81 * (1+.04)
D1 = ..8424

Step 3: - calculation of expected price per share

Rate of return = (D1/P0) +g

Therefore P0 = DI/ (growth rate - rate of return)

P0 = 0.8424/ (7%-4%)

Expected price per share = 28.08