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Castles in the Sand generates a rate of return of 20% on its investments and maintains a plowback ratio of 0.30. Its earnings this year will be $4 per share. Investors expect a 12% rate of return on the stock. Find the price of the stock. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Respuesta :

Baraq

Answer:

$46.67

Explanation:

Given the data from the question

We have

Earnings per share = $4

Growth rate = RoE * Plowback ratio

=> 20% * 0.30

=> Growth rate = 6%

Expected dividend per share(D1) = (1 - 30%) x $4 = $2.80

Current market price(Po) = D1/Ke - g

Current market price(Po) = $2.80 ÷ (0.12 - 0.06)

Po = $2.80 ÷ 0.06

Po = $46.67

Hence, in this case, the correct answer is $46.67 for the price of stock.

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