Ferengi Profiteers is a high-growth mining firm, which prefers to plow back most of its earnings into on-going operations. As a result, it maintains a low dividend payout ratio of 12%. Its permanent earnings are expected to grow at 6%. It announced earnings of $7.22 per share yesterday and its investors are expecting a return of 9% on its stock. What's the trading price of each stock of Ferengi Profiteers?
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A. B. C. D.B
The earnings next year are expected to be 7.22 * 1.06 = $7.65 per share. So the dividend expected next year equals 0.12 * 7.65 = $0.918 per share. The growth rate of dividend also equals 6%. Therefore the price of a stock using the Dividend Discount Model equals P = 0.918/(9% - 6%) = $30.60.