Barbara Bailey does not believe in analyst predictions. She feels that the company could maintain a constant annual growth rate in dividends per share of 6% in the future or possibly 8% for the next two years and 6% thereafter. Bailey is basing her estimates on an established long-term investment plan into the Latin American, European and Canadian Markets.
By venturing into these markets the risk of the firm will increase. The company estimates that the risk premium will increase from 8.9% to 10%. Currently, the company has a risk premium of 6%.
In preparing the long-term financial plan, Bailey Clothiers’ chief financial officer has assigned financial analyst, Scott Markham, to evaluate the firm’s current stock price. He has asked Scott to consider the conservative predictions of the securities analysts and the aggressive predictions of Barbara Bailey.
Scott has compiled the following information from the 20X9 data to assist in his analysis:
Data: 20X9 Value
Earnings per share (E.P.S.) $ 5.25
Price per share of common stock 42.00
Book value of common stock equity $ 48,000,000
Total common shares outstanding 3,000,000
Common stock dividend per share $ 3.50