A company is expected to have earnings of $3.37 per share next year, $4.65 in two...

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A company is expected to have earnings of $3.37 per share nextyear, $4.65 in two years, and $5.23 in three years. The dividendpayout ratio is expected to remain at 20% over the next threeyears. You estimate the risk-free rate to be 4% per year and theexpected market risk premium to be 5% per year. In two years, youexpect the leading PE ratio to be 11. The beta of the stock is 1.1.What would be an appropriate estimate of the stock price today?(Answer to the nearest penny, i.e. 55.55 but do not use a $sign).

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3.9 Ratings (612 Votes)

The stock price today is the Present Value of Future Cash flows ie Present value of future dividends plus Present value of Stock price in year 2 Step1 Calculation See Answer

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A company is expected to have earnings of $3.37 per share nextyear, $4.65 in two years, and $5.23 in three years. The dividendpayout ratio is expected to remain at 20% over the next threeyears. You estimate the risk-free rate to be 4% per year and theexpected market risk premium to be 5% per year. In two years, youexpect the leading PE ratio to be 11. The beta of the stock is 1.1.What would be an appropriate estimate of the stock price today?(Answer to the nearest penny, i.e. 55.55 but do not use a $sign).