[utfan]

I am in over my head in this finance class... can anyone help me?

Here is one of my questions:

Emerson Electric common stock that is selling for $ 80 with a par value of $ 5. This stock recently paid a $ 2.10 dividend, and the firms earnings per share have increased from $ 2.40 to $ 4.48 in the past 5 years. An equivalent amount of growth in the dividend is expected.


What is the value of this investment?

I came up with the answer: $97.57... but I do not feel it is correct...

[ArcSine]

The easy answer is that if Emerson is "selling for $80", then that amount IS its value.

But if the question wants you to go through the exercise of determining a hypothetical intrinsic value based on the 'constant growth' model, then you'll need an appropriate discount rate, in addition to the info that's provided.

Look up the 'Gordon Growth Model' or 'constant growth model'. Note that the model assumes that the dividends will continue to grow at some constant rate (usually denoted g in the model) indefinitely. Assuming the firm maintains a constant payout / plowback ratio, then dividends will grow at precisely the same rate as the earnings themselves.

You're given the earnings growth as 2.40 to 4.48 over the last 5 years, so g should be the geometric mean of that historical growth, or

. The question's wording unfortunately leaves open a little doubt as to whether n should be 4 or 5, but my money's on 4. If 2.40 is the 'base' amount, with 4 subsequent earnings amounts culminating with 4.48, then you'll want to take the fourth root of the 4.48/2.40 ratio in arriving at g.