gs per share equal $4, in what price range you estimate its stock should be selling?

SOLUTION:-

7-14

Present value (PV) = sum of present value of all future cash flows

Assuming returns are generated from dividends only,

After end of 2 years there is a perpetuity model with constant dividend growth which can be calculated using the formula Dividend * (1+ dividend growth rate)/ (return rate - growth rate) which needs to be discounted back from year 2 to year 0 (present value)

PV = 2/(1+15%)^2+ 2*(1+5%)/(15%-5%)/(1+15%)^2

     =$17.39

7-18

Price range of stock can be calculated as follows:-

Price earnings ratio of N stock is  between 28 and 30. earnings per share are $4

Price range=(Price earning ratio of lower value x EPS  to Price earning ratio of higher value x EPS)

                 =(28 x 4 to 30 x 4)

So the price range is 112 to 120$.

It shows the sum of money you are ready to pay for each dollar worth of the earnings of the company