An analyst gathered the following data about a company * Historical earnings retention rate of 60% that is projected to continue into the future * A sustainable return on equity of 10% * A beta of 1 * nominal risk free rate is 5% * Expected market return is 10% If next years EPS is $2, what value would be placed on this stock? a $20 b $22.5 c $30.5 d $35.45
A .8 /(.1-.06) =$20 Is this a trick question?
no, i`m just not smart. How did you calculate 0.8 in the numerator?
would also go with a - same reasoning as above.
2*0.4 since 60% are retained.
next year earnings are $2…dividend payout is 40%. 40% of 2 is .8
A, $20? Ke=5%+1*(10%-5%)=10% g=RR*ROE=.6*.1=6% $2*0.4/(10%-6%)
Appreciate the help. Thanks.