Question: Using Earnings Growth Forecasts to Challenge a Stock Price: Toro Company (Medium) Toro Company, a lawn products maker based in Minnesota, traded at $55 per share in October 2002. The firm had maintained a 20 per cent annual EPS growth rate over the previous five years, and analysts were forecasting $ 5.30 per share earnings for the fiscal year ending October 2003, with a 12 percent growt h rate for the five years thereafter. Use a required return of I 0 percent in answering the following questions.
a. How much is a share of Toro worth based on the forward earnings of $5.30 only (ignoring any subsequent earnings growth)?
b. Toro maintains a dividend payout of 10 per cent of earnings. Based on the forecasted EPS growth rate of 12 percent, forecast cum-dividend earnings for the five years, 2004-2008.
c. Forecast abnormal earnings growth (in dollars) for the years 2004-2008.
d. Do your calculations indicate whether or not Toro is appropriately priced?