Suppose that a firm’s recent earnings per share and dividend per share are $2.40

Question

Suppose that a firm’s recent earnings per share and dividend per share are $2.40 and $1.40, respectively. Both are expected to grow at 8 percent. However, the firm’s current P/E ratio of 23 seems high for this growth rate. The P/E ratio is expected to fall to 19 within five years.    Compute the dividends over the next five years. (Do not round intermediate calculations. Round your final answer to 3 decimal places.)    Dividends Years First year $    Second year $    Third year $    Fourth year $    Fifth year $       Compute the value of this stock in five years. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)    Stock price $       Calculate the present value of these cash flows using a 10 percent discount rate. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)    Present value $   

Suppose that a firm’s recent earnings per share and dividend per share are $2.40 and $1.40, respectively. Both are expected to grow at 8 percent. However, the firm’s current P/E ratio of 23 seems high for this growth rate. The P/E ratio is expected to fall to 19 within five years.    Compute the dividends over the next five years. (Do not round intermediate calculations. Round your final answer to 3 decimal places.)    Dividends Years First year $    Second year $    Third year $    Fourth year $    Fifth year $       Compute the value of this stock in five years. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)    Stock price $       Calculate the present value of these cash flows using a 10 percent discount rate. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)    Present value $   

Suppose that a firm’s recent earnings per share and dividend per share are $2.40 and $1.40, respectively. Both are expected to grow at 8 percent. However, the firm’s current P/E ratio of 23 seems high for this growth rate. The P/E ratio is expected to fall to 19 within five years.    Compute the dividends over the next five years. (Do not round intermediate calculations. Round your final answer to 3 decimal places.)    Dividends Years First year $    Second year $    Third year $    Fourth year $    Fifth year $       Compute the value of this stock in five years. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)    Stock price $       Calculate the present value of these cash flows using a 10 percent discount rate. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)    Present value $   

Explanation / Answer

EPS0 = $2.40

D0 = 1.40

D1 = 1.40*1.08 =

D2 = 1.40*1.08^2 =

D3 = 1.40*1.08^3 =

D4 = 1.40*1.08^4 =

D5 = 1.40*1.08^5 =

Values are in below table

At t = 5, Stock price = (P/E)*EPS = $67

Present value of dividend (D1 to D5):

PV = (1.40*1.08/(0.10 – 0.08))*(1 – 1.08^5/1.10^5) = $6.63

Question says PV of these cash flows which, I believe, refer to dividends only.

If investors sale the stock, PV of stock price 67/1.10^5 also needs to be included.

Year Dividend EPS P/E P 0 1.400 2.400 23 55.20 1 1.512 2.592 2 1.633 2.799 3 1.764 3.023 4 1.905 3.265 5 2.057 3.526 19 67.00

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