Suppose that a firms recent earnings per share and dividend per share are $3.30

Question

Suppose that a firms recent earnings per share and dividend per share are $3.30 and $2.90, respectively. Both are expected to grow at 6 percent. However, the firms current P/E ratio of 30 seems high for this growth rate. The P/E ratio is expected to fall to 26 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.)

Dividends Years

First year $ =

Second year $=

Third year $ =

Fourth year $=

Fifth year $ =

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 an 8 percent discount rate. (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Present value $=

Explanation / Answer

Stock price $ = $38.86

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