What is the theoretical value of a company's stock that:
- has earnings of $1.50 per share,
- Dividend payout ratio of 33%,
- has a perpetual earnings growth rate of 9%,
- Cost of equity of 9%,
- After-tax Cost of debt of 5%, and
- Financial Leverage of 2.1x
First person who comments on this blog post with the right answer wins a free lunch / dinner at Sushi on Bloor on me. If you are outside of Toronto, we can think of some other prize of approximately equivalent value (let's say $20 CND).
Comment on the blog for your official submission.
11 comments:
Hey Josh, figured its around $20.11/
That's not the answer I have in mind, but I'd like to see how you got to your answer! :)
its dicey man, my bad..
-18.45
OH CHAD!!! You're SO CLOSE! Why does EPS growth have to be lower than discount rate? And what is the implication if it isn't?
it would be negative no? I've never heard of a negative earning per share... (if that really is the EPS you are talking about)
Awesome! So close Meg! I can tell you applied the dividend growth model formula.
The model usually makes sense right (aka gives us prices greater than zero). So why is it giving us a negative number? Look at what Chad said as a hint.
What assumption has caused our model to break? Think about present value of cash flows.
the required return, or discount rate, for an investor comes from dividends plus growth of stock value.... r=Div/Price+g ...since dividends are positive, g must be smaller than r...and it wouldn't make sense for someone to expect to get a return that's lower than the rate of growth
-18.45 was my response too hahahah been a loooong time since I last did this stuff...pulled out my finance books for curiosity...don't even know if the right formulas were applied, which is shocking since I deal with stocks everyday
Ding ding ding! Chad gets the answer! I'll write a post shortly about the answer!
you are all wrong. the answer is 7
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