Question
Please calculate the per share value today of Rummel Company common stock based on the following information. The company will have earnings per share of
Please calculate the per share value today of Rummel Company common stock based on the following information.
The company will have earnings per share of $100 one year from now. Further, the company will retain or reinvest 80% of its earnings back into the company for internal projects and be able to earn a 12.5% return on those reinvested project funds during years 2 and 3. To be clear, during year 2 means the time between year 1 and year 2 on a time line; and during year 3 means the time between year 2 and year 3 on a time line.
Beginning with the resultant earnings outcome at year 3, the Rummel Company will change its reinvestment decision such that it will reinvest only 40% of its earnings back into the company and it will only be able to earn a 7.5% return on those reinvested funds. This 40% retention rate and 7.5% reinvestment return will continue forever. For your work assume the equity cost of capital for the Rummel Company is 7%.
As always, be sure to show clearly all your work and be precise with your calculations out to 5 decimal places. Again, please calculate the per share value today of Rummel Company common stock.
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