Problem 10-35 Common stock value based on PV calculations [LO10-5]

Beasley Ball Bearings paid a $4 dividend last year. The dividend is expected to grow at a constant rate of 3 percent over the next four years. The required rate of return is 12 percent (this will also serve as the discount rate in this problem). Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

e. Compute the current value of the stock. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Current value

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f. Use the formula given below to show that it will provide approximately the same answer as part e. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

P0	=	D1
		Ke g

Current value

?

g. If current EPS were equal to $5.15 and the P/E ratio is 20% higher than the industry average of 8, what would the stock price be? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Stock price

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h. By what dollar amount is the stock price in part g different from the stock price in part f? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Amount

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i. With regard to the stock price in part f, indicate which direction it would move if:

(1)	D1 increases	?
(2)	Ke increases	?
(3)	g increases	?