Laurel enterprises expects earnings next year of $4.06 per share and has a 40 % retention rate, which it plans to keep constant. its equity cost of capital is 9 %, which is also its expected return on new investment. its earnings are expected to grow forever at a rate of 3.6 % per year. if its next dividend is due in one year, what do you estimate the firm's current stock price to be?

Current price of stock is $39.44

Explanation:

Data provided in the question:

Enterprises expects earnings next year = $4.06 per share

Retention ratio = 40% = 0.4

Dividend payout ratio = 1 - Retention ratio = 1 - 0.4 = 0.6

Equity cost of capital = 9% = 0.09

Expected growth rate = 3.6% = 0.036

Now,

Dividend paid next year

= Enterprises expects earnings × Dividend payout ratio

= $3.55 × 0.60

= $2.13

Price of the stock =

or

Price of the stock =

or

Price of the stock = $39.44

Hence,

Current price of stock is $39.44

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