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Suppose that a firms recent earnings per share and dividend per share are $3.00 and $2.00, respectively. Both are expected to grow at 10 percent.

Suppose that a firms recent earnings per share and dividend per share are $3.00 and $2.00, respectively. Both are expected to grow at 10 percent. However, the firms current P/E ratio of 29 seems high for this growth rate. The P/E ratio is expected to fall to 25 within five years. Compute the dividends over the next five years. Compute the value of this stock in five years. Calculate the present value of these cash flows using a 12 percent discount rate.

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