Problem 8-35 P/E Model and Cash Flow Valuation (LG8-5, LG8-7)

Suppose that a firms recent earnings per share and dividend per share are $3.60 and $2.60, respectively. Both are expected to grow at 8 percent. However, the firms current P/E ratio of 17 seems high for this growth rate. The P/E ratio is expected to fall to 13 within five years.

Compute the dividends over the next five years. (Do not round intermediate calculations and round your final answers 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 and round your final answer to 2 decimal places.)

Stock price

$

Calculate the price of this stock today, including all six cash flows at discount rate of 10 percent. (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Present value

$

rev: 06_27_2016_QC_CS-54764, 10_22_2016_QC_CS-67036