Suppose that a firm’s recent earnings per share and dividend per share are $2.75 and $1.80,...

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Suppose that a firm’s recent earnings per share and dividend pershare are $2.75 and $1.80, respectively. Both are expected to growat 10 percent. However, the firm’s current P/E ratio of 19 seemshigh for this growth rate. The P/E ratio is expected to fall to 15within five years.
Compute the dividends over the next five years. (Do notround intermediate calculations. Round your answers to 3 decimalplaces.)

Compute the value of this stock price in five years. (Donot round intermediate calculations. Round your answer to 2 decimalplaces.)

Calculate the present value of these cash flows using a 12percent discount rate. (Do not round intermediatecalculations. Round your answer to 2 decimal places.)

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3.8 Ratings (474 Votes)

aDividend over the next 5 years Year Dividend per share First year 180 x 110 1980 Second year 1980 x 110 2178 Third year 2178 x 110 2396 Fourth year 2396 x 110 2635 Fifth year 2635 x 110 2899 bValue of the Stock in 5 Years See Answer

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Suppose that a firm’s recent earnings per share and dividend pershare are $2.75 and $1.80, respectively. Both are expected to growat 10 percent. However, the firm’s current P/E ratio of 19 seemshigh for this growth rate. The P/E ratio is expected to fall to 15within five years.Compute the dividends over the next five years. (Do notround intermediate calculations. Round your answers to 3 decimalplaces.) Compute the value of this stock price in five years. (Donot round intermediate calculations. Round your answer to 2 decimalplaces.) Calculate the present value of these cash flows using a 12percent discount rate. (Do not round intermediatecalculations. Round your answer to 2 decimal places.)