J Jones investment bankers will use a combined earnings and
J. Jones investment bankers will use a combined earnings and dividend model to determine the value of the Allen Corporation. The approach they take is basically the same as that in Table 7–2 on page 172 in the chapter. Estimated earnings per share for the next five years are:
a. If 40 percent of earnings are paid out in dividends and the discount rate is 11 percent, determine the present value of dividends. Round all values you compute to two places to the right of the decimal point throughout this problem.
b. If it is anticipated that the stock will trade at a P/E of 15 times 2012 earnings, determine the stock’s price at that point in time and discount back the stock price for five years at 11 percent.
c. Add together parts a and b to determine the stock price under this combined earnings and dividend model.
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