Question

In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next five years or so, then find the “terminal” stock price using a benchmark PE ratio. Suppose a company just paid a dividend of $1.18. The dividends are expected to grow at 13 percent over the next five years. The company has a payout ratio of 45 percent and a benchmark PE of 20. The required return is 13 percent.

What is the target stock price in five years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  
Target price in 5 years            $

What is the stock price today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  
Stock price today       

Answer 1

Dividend
Year	Dividend
1	1.18 +13% =		1.3334
2	1.3334+13% =		1.51
3	1.51+13% =		1.71
4	1.71+13% =		1.93
5	1.93+13% =		2.18
Dividend at the end of Year-5 is 2.18
Earnings per share at end of Year-5 =2.18 /45 *100 = 4.84
PE ratio =20
PE ratio = Market price/ Earnings per share
20 = Market price / 4.84
Market price = 96.8
Stock price at end of 5 yrs =96.8
Req b:
Stock price today
Year.	Cashflows	PVF at 13%	Present values
1	1.33	0.884956	1.176991
2	1.51	0.783147	1.182551
3	1.71	0.69305	1.185116
4	1.93	0.613319	1.183705
5	2.18	0.54276	1.183217
5	96.8	0.54276	52.53917
Present value of cashflows			58.45
Stockprice today = 58.45 per share