Asked by David Lindsey on May 07, 2024
Verified
If a company has a current stock price of $75, an EPS of $2/share; EPS growth rate of 10% and the investors rate of return is 12%, calculate the cash cow price.
A) $12.67
B) $13.33
C) $14.67
D) $15.33
E) $16.67
EPS Growth Rate
EPS Growth Rate measures the annual rate at which a company's earnings per share (EPS) has grown over a specified time period.
Investors Rate of Return
The percentage of profit or loss made on an investment over a specific period, measuring the efficiency of an investment.
- Absorb information on the rate of increase in dividends and its impact on equity values.
- Employ the indispensable rate of return to evaluate investment options.
Verified Answer
SC
Sathita CheeranontMay 12, 2024
Final Answer :
E
Explanation :
The cash cow price can be calculated using the formula: Cash Cow Price = EPS * (1 + g) / (r - g), where EPS is the earnings per share, g is the growth rate, and r is the required rate of return. Plugging in the values: Cash Cow Price = $2 * (1 + 0.10) / (0.12 - 0.10) = $2.2 / 0.02 = $110. However, since none of the provided options match this calculation, it appears there may have been a misunderstanding in the question or options provided. Based on the calculation method and the options given, there seems to be a mistake in my response or the options listed.
Learning Objectives
- Absorb information on the rate of increase in dividends and its impact on equity values.
- Employ the indispensable rate of return to evaluate investment options.