Suppose that a firm’s recent earnings per share and dividend per share are $2.90

Question

Suppose that a firm’s recent earnings per share and dividend per share are $2.90 and $1.90, respectively. Both are expected to grow at 9 percent. However, the firm’s current P/E ratio of 28 seems high for this growth rate. The P/E ratio is expected to fall to 24 within five years.

Calculate the present value of these cash flows using an 11 percent discount rate. (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Calculate the present value of these cash flows using an 11 percent discount rate. (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Explanation / Answer

9.00

Price earning=24

Earning in the 5th Year=4.09

Then Price in The 5Th Year=24*4.09= 98.16

Present Value = 98.16*.593= $ 58.21

Present Value of Dividend Cash flow Years Dividend Present Vcalue Factor Present Value 1 2.07 0.901 1.87 2 2.26 0.812 1.83 3 2.46 0.731 1.80 4 2.68 0.659 1.77 5 2.92 0.593 1.73 Present Value

9.00

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