Frost Corporation's recent earnings per share were $12.90. Their dividend payout ratio is 20%. Earnings are expected to grow at an average of 6% per year and the company's policy is to maintain the same payout ratio. If investors are requiring a 12% rate of return on this stock, what will they be willing to pay for one share?

Question

Quizplus · Accepted Answer

First, we need to calculate the expected dividend per share (DPS) next year:
DPS = EPS * payout ratio
DPS = 12.90 * 0.20 = $2.58

Next, we need to calculate the expected price of the stock using the dividend discount model:
Price = DPS / (required rate of return - dividend growth rate)
Price = 2.58 / (0.12 - 0.06)
Price = $45.58

Therefore, investors would be willing to pay $45.58 for one share of Frost Corporation's stock.

Frost Corporation's Recent Earnings Per Share Were $12