Could you please show the process how to find this question with formulas. Vanse
ID: 2730425 • Letter: C
Question
Could you please show the process how to find this question with formulas. Vansel Inc. retains most of its earnings. The company currently has earnings per share of $11. Vansel expects itsearnings to grow at a constant rate of 2 percent per year. Furthermore, the average PE ratio of all other firms in Vansel'sindustry is 12. Vansel is expected to pay dividends per share of $3.50 during each of the next three years. If investorsrequire a 10 percent rate of return on Vansel stock, a fair price for Vansel stock today is $____. a. 113.95 b. 111.32 c. 105.25 d. none of the above
Explanation / Answer
we have:
EPS = 11
G=2%
P/E = 12
D1= 3.50
D2=3.50
D3=3.50
We first need to compute the price of the stock at the end of 3rd year:
P3 = D3 x (1+g)/ (R-g)
= 3.50 x (1+0.02)/ (0.10 -0.02)
= 44.625
Now we need to compute PV of all future dividends and future price to get current price of the stok:
Year
Cash flow
PV factor 10%
PV
1
3.5
0.909090909
3.18
2
3.5
0.826446281
2.89
3
3.5
0.751314801
2.63
3
44.625
0.751314801
33.53
42.23
Therefore, current stock price would be 42.23.
None of the above option is correct.
Year
Cash flow
PV factor 10%
PV
1
3.5
0.909090909
3.18
2
3.5
0.826446281
2.89
3
3.5
0.751314801
2.63
3
44.625
0.751314801
33.53
42.23