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Consider Twitter's current stock price: $108.89. Current earnings per share, EPS = $1.29
a) If next year’s earnings are expected to be $3.14, what is the forward P/E ratio of the stock?
b) Assume that Twitter is expected to pay no dividends for the next 5 years. After 5 years, the company’s payout ratio is expected to be 50%. Earnings are expected to grow from $1.29 per share to $35.00 per share by the end of year 5. Using the dividend discount model and an equity cost of capital of 20%, given the current price, what are investors’ expectations of Twitter’s earnings growth after 5 years?
c) If the Fed tightens interest rates by 3% and the equity cost of capital rises by the same amount, using the dividend discount model, what is the effect on Twitter’s current stock price?
Lane, Inc., has an issue of preferred stock outstanding that pays a $6.55 dividend every year in perpetuity. If this issue currently sells for $91 per share, what is the required return?
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