ART has come out with a new and improved product. As a result, the firm projects an ROE of 27%, and it will maintain a plowback ratio of 0.20. Its earnings this year will be $4.0 per share. Investors expect a 15% rate of return on the stock. What price do you expect ART shares to sell for in 4 years
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Question:
ART has come out with a new and improved product. As a result, the firm projects an ROE of 27%, and it will maintain a plowback ratio of 0.20. Its earnings this year will be $4.0 per share. Investors expect a 15% rate of return on the stock. What price do you expect ART shares to sell for in 4 years
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Answer:$41.14Explanation:Dividend per share=$4Divided=1-retained profits=1-.2=.8Cost of equity=15%Growth rate=27%*.2=5.4%The formula is;Current Stock price=Dividend/(cost of equity-growth rate)Current stock price=4(1-.2)/(.15-.27*.2)=$33.33Share price after 4 year will be=$33.33(1+.27*.2)^4=$41.14
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