Maxim Inc. reported a per-share book value of $10.47 in its balance sheet on December 31, 2014. In early 2015, analysts were forecasting consensus earnings per share of $1.71 for 2015 and 1.96 for 2016. Assume a dividend payout ratio of 50% and required rate of return of 10%.
(a) Calculate the per share value in early 2015 assuming that residual earnings will grow at long-term growth rate of 4%, the average GDP growth rate, after 2016. [3]
(b) Maxim Inc. was traded at $36 per share in early 2015. What is the forecast of the residual earnings growth rate after 2016 that is implied in the stock price of $36?