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