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

Answer:

so correct answer is d. 42.93

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 = $\frac{15450000}{21500}$

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 = $\frac{D1}{(1+r)} +\frac{D2}{(1+r)^2} +\frac{P2}{(1+r)^2}$   ...................1

put here value we get

current stock price = $\frac{2.41}{(1+0.104)} +\frac{2.56}{(1+0.104)^2} +\frac{47.11}{(1+0.104)^2}$

current stock price =  42.93

so correct answer is d. 42.93