Explore BrainMass

# The solution to Stock Price

Not what you're looking for? Search our solutions OR ask your own Custom question.

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

Company Z-prime is like Z in all respects save one: Its growth will stop after year 4. In year 5 and afterward, it will pay out all earnings as dividends. What is Z-prime's stock price? Assume next year's EPS is \$15.

Company Z's earnings and dividends per share are expected to grow indefinitely by 5 percent a year. If next year's dividend is \$10 and the market capitalization rate is 8 percent.

#### Solution Preview

g= growth rate = plowback rate x return on capital (=r )

g= 5%
r= 8%
Therefore plowback rate= 62.5% =5%/8%

EPS= \$15
Therefore dividend= \$5.625 =\$15*(100%-62.5%)

Div 1 = Dividend in year ...

#### Solution Summary

The solution calculates stock price given EPS, growth rate of dividends, market capitalization rate etc.

\$2.49