Find the terminal stock price using a benchmark PE ratio

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Reference no: EM13870662

In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next five years or so, then find the “terminal” stock price using a benchmark PE ratio. Suppose a company just paid a dividend of $1.32. The dividends are expected to grow at 17 percent over the next five years. In five years, the estimated payout ratio is 35 percent and the benchmark PE ratio is 20. After five years, the earnings are expected to grow at 7 percent per year. The required return is 11 percent.

Required:

What is the target stock price in five years?(Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Stock price in 5 years $

What is the stock price today?(Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Stock price today $

Reference no: EM13870662

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