3. 30.

PE and terminal share price [LO 8.2] In practice, a common way to value a share when a company pays dividends is to value the dividends over the next five years or so, then find the ‘terminal’ share price using a benchmark PE ratio. Suppose a company just paid a dividend of $1.36. The dividends are expected to grow at 13 per cent over the next five years. In five years, the estimated payout ratio is 40 per cent and the benchmark PE ratio is 19. What is the target share price in five years? What is the share price today assuming a required return of 11 per cent on the shares?