Georgetown Motorcar (GM) common stock currently a is selling for $ 71.44, which
ID: 2667350 • Letter: G
Question
Georgetown Motorcar (GM) common stock currently a is selling for $ 71.44, which it 19 limes its earnings per share (EPS). The most recent dividend paid by GM was $2.00 per share. What is GM's current KPS? What is GM's current dividend payout ratio? (Hint: The payout ratio refers to the percentage of earnings that is paid as dividends.) Assume that GM does not expect to grow in the future and investors require a 12 percent return to invest in the company's stock Compute both the dividend yield and the growth provided by GM's stock. (Hint: The dividend yield is die dividend divided by the current market price of the stock.) The industry P/E ratio normally varies from around 11x to 14x. Using these industry averages, estimate the price at which CM should sell. Discuss some factors that might Justify GM's P/E ratio being greater than the industry average.Explanation / Answer
1.
Common stock selling price is 19 times to EPS.
EPS*19 = $71.44
EPS =$71.44/19
EPS =$3.76
2.
Current dividend pay out ratio = Dividend per share/EPS
= $2/$3.76
=0.531
Dividend pay out ratio is 53.1%.
3.
Required rate of return = Dividend/Current selling price of the share + Growth
12% = $2/$71.44 +Growth
Growth = 12% - 2.8%
=9.2%
4.
Price earning ratio = price per share/earning per share.
11% =Price per share/$3.76
Price per share = 0.11*3.76
=0.4136
14% =Price per share/EPS
Price per share =0.14*3.76
=0.5264
Average of these two prices = (0.4136 +0.5264)/2
=0.94/2
=0.47.
The price per share is that GM should sell is $0.47.
5.
Buying a share when price earning ratio is low that will increase the EPS of the company. This is the factor price per share greater than the industry.