Question

Erna Company is expected to pay a dividend of $2.41 one year from today and $2.56 two years from today. The company's sales in two years are expected to be $15,450,000. The company has a PS ratio of 1.59 times, and 521,500 shares outstanding. If the required return on the company's stock is 10.4 percent, what is the current stock price?a. 5.52b. 4.28c. 38.65d. 42.93

Answer 1

so correct answer is d. 42.93

Step-by-step explanation:

given data

pay a dividend 1 year D1 = $2.41

pay a dividend 2 year D2 = $2.56

sales in 2 years expected = $15,450,000

price/ sale PS ratio = 1.59

shares outstanding = 521500

company stock r = 10.4 percent

solution

first we get here sales per share will be

sales per share =
`(15450000)/(21500)`

sales per share = 29.63

so here P2 is = sales per share × PS ratio

P2 = 29.63 × 1.59

P2 = 47.11

so here current stock price will be

current stock price =
`(D1)/((1+r)) +(D2)/((1+r)^2) +(P2)/((1+r)^2)` ...................1

put here value we get

current stock price =
`(2.41)/((1+0.104)) +(2.56)/((1+0.104)^2) +(47.11)/((1+0.104)^2)`

current stock price = 42.93

so correct answer is d. 42.93