Question
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
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 $1.45. The dividends are expected to grow at 15 percent over the next five years. In five years, the estimated payout ratio is 45 percent and the benchmark PE ratio is 27. |
a. | What is the target stock price in five years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
b. | What is the stock price today assuming a required return of 12.5 percent on this stock? |
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