In practice, a common way to value a share of stock when a company pays dividend
ID: 2640940 • Letter: I
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 years or so, then find the ?terminal? stock price using a benchmark PE ratio. Suppose a company just paid a dividend of $1.15. The dividends are expected to grow at 20 percent over the next five years. In five years, the estimated payout ratio is 40 percent and the benchmark PE ratio is 21. What is the target stock price in five years? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Target stock price $ What is the stock price today assuming a required return of 12 percent on this stock? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Stock price $Explanation / Answer
if the stock dividend is $1.15 and PE ratio is 21, then the stock price is
21X1.15= $24.15
the stock price after 5 years will be= $26.45