Provide scenarios about growth in earnings

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Reference no: EM132206252

Question - Tesla Inc's current market price today is $295. The company has never declared dividends on their common stock, and it intends on retaining all future earnings to finance future growth and therefore, does not anticipate paying any cash dividends in the foreseeable future. Tesla has experienced losses in recent years, but analysts predict 1.412 EPS next year. Assume that Tesla will start paying dividends in 5 years from now. The dividend pay-out ratio in 5 years will be the current median pay-out ratio of the industry. You can use the pay-out ratio of the industry using the average of the dividend pay-out ratio of Tesla's closest competitors (see the table in the prior problem). Earnings are expected to grow for the next 5 years at some high growth rate (which you need to calculate). This growth rate will decline to the current industry median of long-term growth (see table) after year 5, a stable growth that Tesla will maintain in perpetuity.

Question: Provide scenarios about growth in earnings during the next 5 years to justify the current market price.

Reference no: EM132206252

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