Indicate whether the following statement is true or false. Provide explanation o
ID: 2691938 • Letter: I
Question
Indicate whether the following statement is true or false. Provide explanation or calculation to support your answer. 5. Kudrow stock plans to pay a dividend of $5 per share next year, which is expected to increase by 3 percent per year subsequently. The required rate of return is 15 percent. The value of Kudrow stock, according to the dividend discount model, is $ 41.67. Kudrow is expected to generate earnings of $3.22 per share next year. The mean ratio of share price to expected earnings of competitors in the same industry is 13. Based on the P/E model, the valuation of the firmExplanation / Answer
As per Dividend Discount Model,
Price = Dividend/(Discount Rate - Growth Rate)
= 5/(0.15-0.03)
= $41.67
We know that E.P.S. is $3.22 and P/E Ratio is 13.
Hence,
Price/E.P.S. = P/E Ratio
or, Price / 3.22 = 13
or, Price = 13*3.22 = $41.86
Thus, all the information provided is correct. Hence, the answer is TRUE.