(Q. 16 IN B) THE NEXT YEAR EXPECTED EPS (EARNINGS PER SHARE) OF JK...
18. (Q. 16 in B) The next year expected EPS (earnings per share) of JKL corp. is $5; with a dividend payout ratio of 30%, a discount rate of 16%, and a return on equity (ROE) of 20%. What is the current stock price? A) $60B) $65 C) $70 D) $75 Solution D The next dividend will be $5 × 0.30 = $1.50 per share. The plowback ratio is 0.70 implying a growth rate g of: g = Plowback Ratio × ROE = 0.70 × 20% = 14% From the dividend growth model, the price of a share is: 1Div
1
$50.7514 $0
== −16gP r