Question

Suppose that a firm’s recent earnings per share and dividend per share are $3.90 and $2.90, respectively. Both are expected to grow at 7 percent. However, the firm’s current P/E ratio of 20 seems high for this growth rate. The P/E ratio is expected to fall to 16 within five years.

Compute the dividends over the next five years. (Do not round intermediate calculations and round your final answers to 3 decimal places.) Dividends Years First year $ 3.10 Second year $ 3.32 Third year $ 3.55 Fourth year $ 3.80 Fifth year $ 4.07

Compute the value of this stock in five years. (Do not round intermediate calculations and round your final answer to 2 decimal places.) Stock price $ ?

Calculate the price of this stock today, including all six cash flows at discount rate of 9 percent. (Do not round intermediate calculations and round your final answer to 2 decimal places.) Present value $?

Answer #1

EPS in Year 0 = $3.90

g= 7%

So,

Year EPS($) A DF@9% B PV @ 9% (A*B)

1 3.9(1+0.07) = 4.173 0.9174 3.8283

2 4.173(1.07)= 4.465 0.8416 3.7577

3 4.465(1.07)= 4.777 0.7721 3.6883

4 4.777(1.07)= 5.112 0.7084 3.6213

5 5.112(1.07)= 5.469 0.6499 3.5544

Total 18.45

Add: EPS Year 0 3.90

PV of Cash flows today 22.35

So, P/E in 5th year = 16

P/E = MPS/EPS

16 = MPS/5.47

MPS = 16 x 5.47

MPS = $87.52

The value of this stock in five years is $87.52

The price of stock today, including all six cash flows at discount rate of 9 percent (MPS ) = P/E TODAY * EPS = 20*22.35 = $447

Suppose that a firm’s recent earnings per share and dividend per
share are $2.70 and $1.70, respectively. Both are expected to grow
at 9 percent. However, the firm’s current P/E ratio of 18 seems
high for this growth rate. The P/E ratio is expected to fall to 14
within five years. Compute the dividends over the next five years.
Compute the value of this stock price in five years Calculate the
present value of these cash flows using an 11...

Rick’s Department Stores has had the following pattern of
earnings per share over the last five years:
Year
Earnings
per share
20XU
$
12.00
20XV
12.60
20XW
13.23
20XX
13.89
20XY
14.58
The earnings per share have grown at a constant rate (on a
rounded basis) and will continue to do so in the future. Dividends
represent 40 percent of earnings.
a. Project earnings and dividends for the next
year (20XZ). (Do not round intermediate calculations. Round
the final...

Rick’s Department Stores has had the following pattern of
earnings per share over the last five years: Year Earnings per
share 20XU $ 11.00 20XV 11.55 20XW 12.13 20XX 12.74 20XY 13.38 The
earnings per share have grown at a constant rate (on a rounded
basis) and will continue to do so in the future. Dividends
represent 40 percent of earnings. a. Project earnings and dividends
for the next year (20XZ). (Do not round intermediate calculations.
Round the final answers...

The Herjavec Co. just paid a dividend of $1.35 per share on its
stock. The dividends are expected to grow at a constant rate of 3
percent per year indefinitely. Investors require a return of 10
percent on the company's stock.
What is the current stock price? (Do not round intermediate
calculations and round your answer to 2 decimal places, e.g.,
32.16.)
Current price
$
What will the stock price be in three years? (Do not round
intermediate calculations...

The Nearside Co. just paid a dividend of $1.55 per share on its
stock. The dividends are expected to grow at a constant rate of 6
percent per year, indefinitely. Investors require a return of 14
percent on the stock.
a.
What is the current price? (Do not round intermediate
calculations and round your answer to 2 decimal places, e.g.,
32.16.)
b.
What will the price be in three years? (Do not round
intermediate calculations and round your answer...

Upper Gullies Corp. just paid a dividend of $2.70 per share. The
dividends are expected to grow at 19 percent for the next eight
years and then level off to a 7 percent growth rate indefinitely.
If the required return is 14 percent, what is the price of the
stock today? (Do not round intermediate calculations. Round
the final answer to 2 decimal places.)
Stock price
$

The Jackson-Timberlake Wardrobe Co. just paid a dividend of
$1.20 per share on its stock. The dividends are expected to grow at
a constant rate of 4 percent per year indefinitely. Investors
require a return of 10 percent on the company's stock.
a. What is the current stock price? (Do not round intermediate
calculations and round your answer to 2 decimal places, e.g.,
32.16.)
b. What will the stock price be in 3 years? (Do not round
intermediate calculations and...

Could I Industries just paid a dividend of $1.34 per share. The
dividends are expected to grow at a rate of 19.3 percent for the
next five years and then level off to a growth rate of 6 percent
indefinitely. If the required return is 10 percent, what is the
value of the stock today?
(Do not round intermediate calculations. Round your answer to 2
decimal places.)

The Jackson–Timberlake Wardrobe Co. just paid a dividend of
$1.85 per share on its stock. The dividends are expected to grow at
a constant rate of 4 percent per year indefinitely. Investors
require a return of 12 percent on the company's stock.
What is the
current stock price? (Do not round intermediate
calculations and round your answer to 2 decimal places, e.g.,
32.16.)
Current price
$
What will the
stock price be in three years? (Do not round intermediate...

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 $1.30. The
dividends are expected to grow at 12 percent over the next five
years. In five years, the estimated payout ratio is 34 percent and
the benchmark PE ratio is 24.
What...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 5 minutes ago

asked 8 minutes ago

asked 10 minutes ago

asked 10 minutes ago

asked 18 minutes ago

asked 40 minutes ago

asked 42 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago