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Zero growth valuation models

In each of the following situations assume a zero-growth rate for earnings and dividends (NPVGO is zero), that all earnings are paid out as dividends, and that the earnings-based valuation model is being used.

1. Dennison Corporation's earnings are expected to be $7.00 per share and its stock price is $28.00. What is the required rate of return on the firm's equity?

2. Sampson Corporation's ernings are expected to be $5.00 per share and its required rate of return on equity is 22%. What is the current price of the stock?

3. Johnson Corporation's current stock price is $40.00 and its required rate of return on equity is 15%. What is the firm's expected earnings?

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Solution:

1. Dennison Corporation's earnings are expected to be $7.00 per share and its stock price is $28.00. What is the required rate of return on the firm's equity?

Dividend=Expected earnings=$7
Price of stock=$28

Price of stock=Dividend/required ...

Solution Summary

There are three short solution type problems on earning-based equity valuations. Solution to first problems explains the steps to find out required rate of return on firm's equity. Solution to second problem depicts the methodology to find out current price of the stock. Solution to third problem determines the firm's expected earnings.

$2.19