ART has come out with a new and improved product. As a result, the firm projects
ID: 2641464 • Letter: A
Question
ART has come out with a new and improved product. As a result, the firm projects an ROE of 30%, and it will maintain a plowback ratio of 0.20. Its earnings this year will be $3.0 per share. Investors expect a 16% rate of return on the stock. What price do you expect ART shares to sell for in 4 years?
ART has come out with a new and improved product. As a result, the firm projects an ROE of 30%, and it will maintain a plowback ratio of 0.20. Its earnings this year will be $3.0 per share. Investors expect a 16% rate of return on the stock. What price do you expect ART shares to sell for in 4 years?
Explanation / Answer
ART has come out with a new and improved product. As a result, the firm projects an ROE of 30%, and it will maintain a plowback ratio of 0.20. Its earnings this year will be $3.0 per share. Investors expect a 16% rate of return on the stock. What price do you expect ART shares to sell for in 4 years?
EPS = $ 3
Expected Dividend = 3*(1-0.20) = 2.40
Growth Rate = ROE*plowback ratio
Growth Rate = 30*0.20 = 6%
Expected Dividend at the 5 year = 2.40*1.06^4 = 3.03
Price do you expect ART shares to sell for in 4 years = Expected Dividend at the 5 year /(expected rate of return - Growth Rate )
Price do you expect ART shares to sell for in 4 years = 3.03/(16%-6%)
Price do you expect ART shares to sell for in 4 years = $ 30.30