Nusa_Havoro Posts: 5, Reputation: 1 New Member #1 Sep 26, 2009, 10:49 PM
Find price per share of stock?
discount rate = 15%
gross revenues last year = $3 million total costs =$1.5 million
gross revenue and costs expected to grow @ 5% per year

can any one help to solve that question
 morgaine300 Posts: 6,561, Reputation: 276 Uber Member #2 Sep 27, 2009, 01:43 AM

Please see the guidelines for posting homework problems:
Ask Me Help Desk - Announcements in Forum : Homework Help

Can you show us your attempts at solving the problem?
 Nusa_Havoro Posts: 5, Reputation: 1 New Member #3 Sep 27, 2009, 06:02 PM
Well this is my attempts from this question
EPS = Net earning / outstanding shares
= (3 - 1.5) / 1
= 1.5

Price per share = EPS / Discount rate - growth
= 1.5 / (.15 - .05)
= $15 Is this correct...  Nusa_Havoro Posts: 5, Reputation: 1 New Member #4 Sep 27, 2009, 06:18 PM Originally Posted by morgaine300 Please see the guidelines for posting homework problems: Ask Me Help Desk - Announcements in Forum : Homework Help Can you show us your attempts at solving the problem? Well this is my attempts from this question EPS = Net earning / outstanding shares = (3 - 1.5) / 1 = 1.5 Price per share = EPS / Discount rate - growth = 1.5 / (.15 - .05) =$15

Is this correct...
 morgaine300 Posts: 6,561, Reputation: 276 Uber Member #5 Sep 27, 2009, 06:27 PM

Double posting won't get an answer quicker. Please be patient until someone who can answer it comes along. (Any of us will point you to the homework guidelines, but you need to wait for someone who does finance to check it for you.)
 ArcSine Posts: 969, Reputation: 106 Senior Member #6 Sep 28, 2009, 06:55 AM
Nusa Havoro, it looks like you've got an idea of how to proceed, but we'll have to polish it up just a bit.

You're correct in using a Constant Growth Model for the basic valuation, which sets up as...

$V\ =\ \frac{C_1}{r-g}$

V is the value of a cash flow stream which is growing at a fixed rate g; $C_1$ is the amount to be received one year after the valuation date; and r is the discount rate.

So far, so good... I see this is the pricing approach you're taking. Now for the polishing-up part.

First, your computation implies that there are 1M shares outstanding. Since this isn't stated explcitly in your information, confirm from your text that this is the correct number of outstanding shares.

Next, notice that I emphasized "one year after the valuation date", above. Suppose we're pricing the stock as of today, using the CG Model. We need $C_1$ to be next year's cash flow. According to your info, it was $1.5M last year. If it's growing at a fixed 5%, what will it be this year, and then next year? So if you'll (1) compute next year's net earnings given the 5% annual growth rate; and (2) confirm that the earnings are indeed spread across 1 M shares; then you should be fine pricing the stock with the CG Model. Not your question?  Question Tools Search this Question Search this Question: Advanced Search ### Add your answer here. ## Check out some similar questions! Price Per Share [ 1 Answers ] How to calculate price per share Sales = 10,000 units Sales Price per unit =$10 Variable Cost per unit = $5 Fixed Costs =$10,000 Bonds Outstanding = 15,000 Kd = on Outstanding Bonds = 8% Tax Rate = 40% Shares of Common Stock Outstanding = 10,000 Beta = 1.4 Krf = 5%

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