You are an investor interested in the PE ratio of a firm. There are two likely scenarios, a high-growth scenario where the firm's earnings are growing rapidly at 30% in the next 4 years and a steady-growth scenario where you expect the growth in earnings to grow somewhat more conservatively at 15% in the next 4 years. In the years following year 4, the firm's earnings are expected to grow at a steady 8% for both scenarios (low/steady growth phase).

Use the two-stage dividend discount model.

 

Calculate the PE ratio of the high-growth scenario (30% growth in EPS for the next 4 years). 

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Other input variables Length of high growth phase Cost of equity in high growth phase Cost of equity in low/steady growth phase Dividend payout ratio in high growth phase Dividend payout ratio in low/steady growth phase Dividend payment per share today 4 years 15% 10% 5% 25% $3 Other input variables Length of high growth phase Cost of equity in high growth phase Cost of equity in low/steady growth phase Dividend payout ratio in high growth phase Dividend payout ratio in low/steady growth phase Dividend payment per share today 4 years 15% 10% 5% 25% $3

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SOLUTION To calculate the PE ratio of the highgrowth scenario we can use the twostage dividend disco... View the full answer