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Company L has earnings of $10 per share and investors expect that the earnings per share will grow by 3 percent per year. Furthermore, the
Company L has earnings of $10 per share and investors expect that the earnings per share will grow by 3 percent per year. Furthermore, the mean PE ratio of all other firms in the same industry as the company is 12. Company L is expected to pay a dividend of $4 per share over the next four years, and investors of the company require a return of 10 percent.
a. Using price-earnings method, calculate the stock price of the company in four years.
b. Using adjusted dividend discount model, calculate the stock price of the company today.
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