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Suppose that a firm’s recent earnings per share and dividend per share are $2.80 and $1.90, respectively. Both are expected to grow at 11 percent. However, the firm’s current P/E ratio of 20 seems high for this growth rate. The P/E ratio is expected to fall to 16 within five years. |
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Compute the dividends over the next five years. (Do not round intermediate calculations and round your final answers to 3 decimal places.) |
| Dividends | Years | ||||||
| First year | $ [removed] | ||||||
| Second year | |||||||
| Third year | |||||||
| Fourth year | |||||||
| Fifth year |
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Compute the value of this stock price in five years. (Do not round intermediate calculations and round your final answer to 2 decimal places.) |
| Stock price |
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Calculate the present value of these cash flows using a 13 percent discount rate. (Do not round intermediate calculations and round your final answer to 2 decimal places.) |
| Present value |
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Suppose that a firm’s recent earnings per share and dividend per share are $2.80 and $1.90, respectively. Both are expected to grow at 11 percent. However, the firm’s current P/E ratio of 20 seems high for this growth rate. The P/E ratio is expected to fall to 16 within 5 years
Solution:
Both are expected to grow at 11 percent
Under these two scenarios
(
)
(
)
(
)
36
.
94
$
11
.
0
1
80
.
2
$
20
1
5
0
5
=
+
´
´
=
+
´
´
=
n
n
g
E
E
P
P
(
)
(
)
(
)
22
.
51
$
11
.
0
1
90
.
1
$
16
1
5
0
5
=
+
´
´
=
+
´
´
=
n
n
g
E
E
P
P
