Question
IBM has had earnings growth of 10% for the past 5 years and has a reasonable expectation that earnings will continue at that rate for
IBM has had earnings growth of 10% for the past 5 years and has a reasonable expectation that earnings will continue at that rate for the next 10 years. Most analyst believe that growth will decline each year after that by 0.5% until it reaches a steady long term growth rate of 5%. Analyst anticipate that its Earnings this year were $3 per share, it pays out 60% of it earnings as dividends and will have to continue to do so in order to maintain the current growth scenario, and the risk free rate is 4%. We also expect that the proper Beta of IBM is 1.25 and the expected market return is 8%. Using the given information, answer the following questions.
a. What is the appropriate required rate of return of IBM?
b. What is the expected Earning at year 11?
c. What is the amount of dividend at year 1?
d. What would the expected price of the stock be?
e. In order to maintain the given growth rates, the payout ratio is assumed to be 60% at this year and increase by 1% each year until the earning reaches the constant growth rate. After that, the payout ratio also is assumed to be stable. Then, what is the expected price of the stock?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started