Shirley's Sandwiches expects earnings per share of this year (at t=1) of $15.03. The company has...

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Shirley's Sandwiches expects earnings per share of this year (at t=1) of $15.03. The company has a large number of good projects and plans to reinvest all earnings with a return on new investment of 18.5%. This will continue until t=8. At that point, the firm expects to have fewer good projects. It will, therefore, begin paying a dividend of 28% of earnings (the first payment at t=8), with all remaining earnings reinvested with a return on new investment of 3.9%. The payout ratio and return on new investment is expect to stay constant forever. If Shirley's cost of equity capital is 13.2%, what is the current price of the stock? Shirley's Sandwiches expects earnings per share of this year (at t=1) of $15.03. The company has a large number of good projects and plans to reinvest all earnings with a return on new investment of 18.5%. This will continue until t=8. At that point, the firm expects to have fewer good projects. It will, therefore, begin paying a dividend of 28% of earnings (the first payment at t=8), with all remaining earnings reinvested with a return on new investment of 3.9%. The payout ratio and return on new investment is expect to stay constant forever. If Shirley's cost of equity capital is 13.2%, what is the current price of the stock?

Answer rating: 100% (QA)

1 Calculate Dividend at t 8 Given EPS1 Earnings per share at t 1 ... View the full answer