Question: Suppose that a firm s recent earnings per share and dividend
Suppose that a firm’s recent earnings per share and dividend per share are $2.75 and $1.60, respectively. Both are expected to grow at 9 percent. However, the firm’s current P/E ratio of 23 seems high for this growth rate. The P/E ratio is expected to fall to 19 within five years. Compute a value for this stock by first estimating the dividends over the next five years and the stock price in five years. Then discount these cash flows using an 11 percent required rate.
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