# 2011 Business 3 Text Update - P t = D (t+1) / (R – g) D...

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This first page gives a listing of the corrected lecture text pages that follow. Print these corrected pages and insert in the lecture text. BUSINESS Date Added Lecture Page Number Description 03/14/2011 B-3 75 Text change

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Becker Professional Education | CPA Exam Review Business 3 © 2010 DeVry/Becker Educational Development Corp. All rights reserved. B3- 75 CONCEPT EXAMPLE Baker Corporation pays a dividend of \$5 per year and is projected to grow at 4% per year. Able wants to invest in Baker and wants to earn a 20% return. What will Able pay for Baker today (Year 0)? P t = D (t+1) / (R g) D (0+1) = \$5 × 1.04 D (0+1) = \$5.20 P t = \$5.20 / (.20 .04) P t = \$5.20 / (.16) P t = \$32.50 CONCEPT EXAMPLE Baker Corporation pays a dividend of \$5 per year and is projected to grow at 4% per year. Able wants to invest in Baker and wants to earn a 20% return. What will Able pay for Baker in three years?
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Unformatted text preview: P t = D (t+1) / (R – g) D (t+1) = \$5 × 1.04 × 1.04 × 1.04, or D (t+1) = \$5 × (1.04) 3 D (t+1) = \$5 × 1.124864 D (t+1) = \$5.62 P t = D (t+1) / (R - g) P t = (\$5.62 × 1.04) / (.20 – .04) P t = \$5.84 / (.16) P t = \$36.53 D. Alternate Approaches – P/E Ratio Value of equity: (P ) = (P 0 / E 1 ) × E 1 Terms are defined as: P 0 = Price or value today. E 1 = Expected earnings in one year. C O N C E P T E X A M P L E The P/E ratio is an identity formula that focuses on the relationships that will later serve as a basis to forecast share price. Assume Baker Corporation has a current price of \$10 and anticipates earnings per share in the coming year of \$2 based on current year earnings per share of \$1.50. Using price earnings formulas, we would confirm the value of Baker's stock as follows: (P ) = (P 0 / E 1 ) × E 1 (P ) = (\$10 / \$2) × \$2 (P ) = 5 × \$2 (P ) = \$10...
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## This note was uploaded on 09/25/2011 for the course ACCOUNTING AC591 taught by Professor W during the Spring '11 term at Keller Graduate School of Management.

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2011 Business 3 Text Update - P t = D (t+1) / (R – g) D...

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