Suppose that a firm's recent earnings per share and dividend per share are $3.15 and $2.60, respectively. Both are expected to grow at 6 percent. However, the firm's current P/E ratio of 27 seems high for this growth rate. The P/E ratio is expected to fall to 23 within five years. Compute the dividends over the next five years. Compute the value of this stock price in five years. Calculate the present value of these cash flows using an 8 percent discount rate.

Suppose that a firm's recent earnings per share and dividend per share are $3.15 and $2.60, respectively. Both are expected to grow at 6 percent. However, the firm's current P/E ratio of 27 seems high for this growth rate. The P/E ratio is expected to fall to 23 within five years. Compute the dividends over the next five years. Compute the value of this stock price in five years. Calculate the present value of these cash flows using an 8 percent discount rate.

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

8th Edition

ISBN:9781285065137

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter8: Risk And Rates Of Return

Section: Chapter Questions

Problem 6DQ

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