In practice, a common way to value a share of stock when a company pays dividends...

 

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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 $1.31. The dividends are expected to grow at 16 percent over the next five years. In five years, the estimated payout ratio will be 30 percent and a benchmark PE will be 19. The required return is 14 percent. a. What is the target stock price in five years? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. b. What is the stock price today? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. a. Target price in five years b. Stock price today 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 $1.31. The dividends are expected to grow at 16 percent over the next five years. In five years, the estimated payout ratio will be 30 percent and a benchmark PE will be 19. The required return is 14 percent. a. What is the target stock price in five years? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. b. What is the stock price today? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. a. Target price in five years b. Stock price today

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Stock Valuation using Dividend Discount Model DDM a Target Stock Price in Five Years We can use the Gordon Growth Model GGM a variation of the DDM to ... View the full answer