The current book value per share ofB.L. Black & Sons is $5.65 and the required return on the stock is 16 percent. The firm expects earnings per share of $1.85 next year with annual earnings growth of 4.5 percent. What is the current market value of this stock?

Question

Quizplus · Accepted Answer

We can use the Gordon Growth Model formula to find the current market value of the stock:

P = D / (r - g)

Where: 
P = current market value of the stock
D = expected dividend per share next year = earnings per share x payout ratio 
= $1.85 x 60% = $1.11
r = required return = 16%
g = expected annual growth rate in earnings = 4.5%

Plugging in the values, we get:

P = $1.11 / (0.16 - 0.045) = $13.88

Therefore, the current market value of the stock is $13.88. So, the best choice is C.

The Current Book Value Per Share OfB