Question

# 25. Xenon, Inc. just paid a dividend of \$1.25 (Do). This dividend was paid out of...

25. Xenon, Inc. just paid a dividend of \$1.25 (Do). This dividend was paid out of \$2.00 earnings per share that the company made this year. Dividends are expected to grow at a rate of 20 percent for the next 2 years, then drop to a constant growth rate of 5 percent thereafter. If the required rate of return for this stock 12 percent, what is the company's PE ratio today? Show your work in the uploaded document

#### Homework Answers

Answer #1

PE Ratio = MPS / EPS

MPS or P0 = PV of Cfs from it.

Div Calculation:

 Year CF Formula Calculation 1 \$      1.50 D0(1+g) 1.25*1.20 2 \$      1.80 D1(1+g) 1.50*1.20 3 \$      1.89 D2(1+g) 1.8*1.05

P2 = D3 / [ Ke - g ]

= \$ 1.89 / [ 12% - 5% ]

= \$ 1.89 / 7%

= \$ 27

P0:

 Year CF PVF @12% Disc CF 1 \$         1.50 0.8929 \$      1.34 2 \$         1.80 0.7972 \$      1.43 2 \$       27.00 0.7972 \$   21.52 Price of Stock \$   24.30

PE Ratio = MPS / EPS

= 24.30 / 2

= 12.15 times

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