Question

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**

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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