Question
Question 1 : FPT is a mature manufacturing firm. The company just paid a dividend of $5.40 but management expects to reduce the payout by
Question 1: FPT is a mature manufacturing firm. The company just paid a dividend of $5.40 but management expects to reduce the payout by 3.2 percent per year, indefinitely. If you require a return of 10 percent on this stock, what will you pay for a share today?
Question 2: In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next seven years or so, then find the terminal stock price using a benchmark PE ratio. Suppose a company just paid a dividend of $3.50. The dividends are expected to grow at 8 percent over the next seven years. The company has a payout ratio of 35 percent and a benchmark PE of 45. What is the target stock price in seven years? What is the stock price today assuming a required return of 12 percent on this stock?
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