Taro Company, a lawn products maker based in Minnesota, traded at $55 per share in October 2002.

Question:

Taro Company, a lawn products maker based in Minnesota, traded at $55 per share in October 2002. The firm had maintained a 20 percent annual EPS growth rate over the previous five years, and analysts were forecasting $5.30 per share earnings for the fiscal year ending October 2003, with a 12 percent growth rate for the five years thereafter. Use a required return of 10 percent in answering the following questions.
a. How much is a share of Toro worth based on the forward earnings of $5.30 only (ignoring any subsequent earnings growth)?
b. Toro maintains a payout of 10 percent of earnings. Based on the forecasted EPS growth rate of 12 percent, forecast cum-dividend earnings for the five years, 2004-2008.
c. Forecast abnormal earnings growth for the years 2004-2008.
d. Do your calculations indicate whether or not Taro is appropriately priced?

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...