dividend, earnings and price growth rate?

Question

A stock is currently priced at $25/share. (jan 07'). analysts are expecting end of year earnings of $5/share for 07'. Of these, 50% are expected to be paid out as dividends... 50% remaining, retained for reinvestment. The required rate of return expected by shareholders is 13% and the co has 20million shares outstanding.

a) What is the divident, earnings and price growth rate that analysts must currently anticipate to justify the current share price?


Thanks!

Answer 1

That's not a good question. If you have any two of those three variables, then you can solve for the third, but you can't solve for all three simultaneously. There is an infinite combination that can arrive at the same price.

But using the forecast dividend and earnings given in your example, the implied growth rate would be found as follows:

Implied Growth = Required Return - (Expected Dividend/Current Price)

Expected Dividend = $5 * 0.5 = $2.50
Required Return = 0.13
Current Price = 25

Therefore implied growth is:

0.13-(2.50/25) = 3%