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LeBlanc Inc. currently has earnings of $10 per share, and investors expect that the earnings per share will grow by 3 percent per year. Furthermore, the mean PE ratio of all other firms in the same industry as LeBlanc Inc. is 15. LeBlanc is expected to pay a dividend of $3 per share over the next four years, and an investor in LeBlanc requires a return of 12 percent. What is the forecasted stock price of LeBlanc in four years, using the adjusted dividend discount model?

Respuesta :

Answer:

Stock Price of LeBlanc in four years = $37.517

Explanation:

Dividend Discount model is as follows:

[tex]P_4 = \frac{D_5}{K_e - g}[/tex]

Where,

[tex] P_4 [/tex] = Price of share at end of four years

[tex] D_5 [/tex] = Dividend to be paid at end of 5th year

[tex]K_e[/tex] = return on equity or cost of equity

g = growth rate

Now we have the information as follows:

Dividend at 5th year end = ((($3 per share + 3%) + 3%) + 3%) +3% = 3.765

Cost/ Return on equity = 12%

Growth rate = 3%

Therefore price = [tex]\frac{3.3765}{0.12 - 0.03}[/tex]

= [tex]\frac{3.3765}{0.09}[/tex]

Stock Price of LeBlanc in four years

= $37.517