A firm is expected to produce earnings next year of $3 per share. It plans to reinvest 25% of its earnings at 20%. If the cost of equity is 11%, what should be the value of the stock?

Name: A firm is expected to produce earnings next year of $3 per share. It plans to reinvest 25% of its earnings at 20%. If the cost of equity is 11%, what should be the value of the stock?
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Question

Quizplus · Accepted Answer

g = 0.25 × 0.20 = 0.05 D₁ = $3(1 − 0.25) = $2.25 P₀ = $2.25/(0.11 − 0.05) = $37.50

A Firm Is Expected to Produce Earnings Next Year of $3