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 $2.50 and $1.30, respectively. Both are expected to grow at 8 percent. However, the firm’s current P/E ratio of 22 seems high for this growth rate. The P/E ratio is expected to fall to 18 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 a 10 percent required rate.

Membership TRY NOW
  • Access to 800,000+ Textbook Solutions
  • Ask any question from 24/7 available
  • Live Video Consultation with Tutors
  • 50,000+ Answers by Tutors
Relevant Tutors available to help