[trailnut]

Emerson Electric common stock selling for $36.75, with a par value of $5. The stock recently paid a $1.32 dividend and the firm’s earnings per share has increased from $1.49 to $3.06 in the past five years. The firm expects to grow at the same rate for the foreseeable future.

Common Stock:
par= 5.00
dividend= 1.32
EPS growth= 12.48%
selling price= 36.75
required rate= 15%
Value=

I keep getting a negative current value which doesn't make sense. I am using the formula:
dividend/required rate - growth rate
Do I use the EPS growth rate?

[ArcSine]

Looks like some preliminary clarifications are in order.

For one, if you're given the current trading price of the stock in the background info, it'd be unusual for a problem to be asking you to determine Value. More commonly, the problem would ask you to use the growth model, along with the given info (current share price, expected growth rate, expected dividend one year hence) to solve for the discount rate.

In agreement with that point, the discount rate is not part of the info supplied in the problem, thus suggesting that this is the variable for which to solve. (However, you're showing a discount rate of 15%; where did that come from?)

Second, I think you might have a typo; the 5-year EPS overall growth equates to an annual average growth rate of 15.48%.

As to the negative share price you're coming up with, that's simply because you have a growth rate g that exceeds the discount rate r in the denominator (assuming, as mentioned, that you meant g = 15.48%). The growth model only returns a realistic answer when r > g.

So get those tidbits cleared up before proceeding, and then also remember that the model wants next year's expected dividend in the numerator.

[roadrunner5383]

You have finally saved $10,000 and are ready to make your first investment. You have the three following alternatives for investing that money:

• Capital Cities ABC, Inc. bonds with a par value of $1,000, that pays an 8.75 percent on its par value in interest, sells for $1,314, and matures in 12 years.

• Southwest Bancorp preferred stock paying a dividend of $2.50 and selling for $25.50.

• Emerson Electric common stock selling for $36.75, with a par value of $5. The stock recently paid a $1.32 dividend and the firm’s earnings per share has increased from $1.49 to $3.06 in the past five years. The firm expects to grow at the same rate for the foreseeable future.

Your required rates of return for these investments are 6 percent for the bond, 7 percent for the preferred stock, and 15 percent for the common stock. Using this information, answer the following questions.

a. Calculate the value of each investment based on your required rate of return.

b. Which investment would you select? Why?

c. Assume Emerson Electric’s managers expect an earnings downturn and a resulting decrease in growth of 3 percent. How does this affect your answers to parts a and b?

d. What required rates of return would make you indifferent to all three options?

[ArcSine]

What have you come up with so far? Until you show your solution attempt, you leave us nothing to advise you on.