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Suppose that a firm’s recent earnings per share and dividend per share are $3.50 and $2.50, respectively. Both are expected to grow at 7 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.)
Dividends Years
First year $2.675
Second year $2.862
Third year $3.063
Fourth year $3.277
Fifth year $3.506
Compute the value of this stock in five years. (Do not round intermediate calculations and round your final answer to 2 decimal places.)
Stock price $58.91
Calculate the present value of these cash flows using a 9 percent discount rate. (Do not round intermediate calculations and round your final answer to 2 decimal places.)
Present value $
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