During the past 7 years, Burger Flippin' Corp.'s earnings have grown from $0.78 to $1.95 per share. If the past growth rates are expected to continue into the future, what is the current value of Flippin's common stock to an investor who requires a 16% rate of return?

Question

Quizplus · Accepted Answer

Using the formula for the constant growth model, P = (D / (r - g)), where P is the current stock price, D is the most recent dividend, r is the required rate of return, and g is the expected growth rate. 
We can calculate the expected dividend for the current year as: 
Expected dividend = (1.95 - 0.78) + 1.95 = $3.12 
Using the given rate of return of 16%, and the growth rate of (1.95 / 0.78)^(1/7) - 1 = 14.34%, we can calculate the stock price as: 
P = (3.12 / (0.16 - 0.1434)) = $111.15 
Therefore, the current value of Flippin's common stock is $111.15.

During the Past 7 Years, Burger Flippin' Corp