Question

In practice, a common way to value a share of stock when a company pays dividends...

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       

Homework Answers

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
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