Canberra Corp expects to have earnings per share of $8.40 in the coming year.Canberra has a return on new investment of 14%.If the firm's dividend payout rate is 75%,and its equity cost of capital is 9%,what is the value of Canberra's stock?

Question

Quizplus · Accepted Answer

The value of the stock can be calculated using the Gordon Growth Model: P = D1 / (r - g). The dividend per share (D1) is 75% of $8.40, which is $6.30. The growth rate (g) is the return on new investment (14%) times the retention rate (25%), which is 3.5%. The equity cost of capital (r) is 9%. Therefore, P = $6.30 / (0.09 - 0.035) = $114.55.

Canberra Corp Expects to Have Earnings Per Share of $8