value: 10.00 points Suppose that a firm\'s recent earnings per share and dividen

Question

value: 10.00 points Suppose that a firm's recent earnings per share and dividend per share are $2.60 and $1.50, respectively. Both are expected to grow at 12 percent. However, the firm's current P/E ratio of 16 seems high for this growth rate. The P/E ratio is expected to fall to 12 within five years. Compute the dividends over the next five years. (Do not round intermediate calculations and round your final answers to 3 decimal places.) Years A A Dividends First year Second year Third year Fourth year Fifth year A A A Compute the value of this stock price in five years. (Do not round intermediate calculations and round your final answer to 2 decimal places.) Stock price Calculate the present value of these cash flows using a 14 percent discount rate. (Do not round intermediate calculations and round your final answer to 2 decimal places.) Present value

Explanation / Answer

Stock Price At the end of 5Th year is

P/E Ratio = 12

Eps at the end of 5th year = 2.60(1+ .12)5 = 4.58

Then MPS = 4.58*12 = 54.96

Present Value of Share

Year g = 12% Dividend D0(1+g) 0 1.5 1.5 1 1.5+12% 1.68 - 2 1.68+12% 1.8816 - 3 1.88+12% 2.107392 - 4 2.10+12% 2.360279- 5 2.36+12% 2.643513

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