Calculation of Share Price of Westonian’s Stock-Multiple Choice Question
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Question
You expect that Westonian Enterprises will have earnings per share of $2 for the coming year. Westonian plans to retain all of its earnings for the next three years. For the subsequent two years, the firm plans on retaining 50% of its earnings. It will then retain only 25% of its earnings from that point forward. Retained earnings will be invested in projects with an expected return of 20% per year. If Westonian’s equity cost of capital is 12%, then the price of a share of Westonian’s stock is closest to:
A) $17.00
B) $10.75
C) $27.75
D) $43.50
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