In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the...
|
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 $1.35. The dividends are expected to grow at 13 percent over the next five years. In five years, the estimated payout ratio is 35 percent and the benchmark PE ratio is 25. |
| 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 11.5 percent on this stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
Homework Answers
Requirement (a). Target stock price in five years
Target stock price in five years = Earnings per share (EPS) in Year 5 x Benchmark P/E Ratio
Earnings per share (EPS) in Year 5 = D5 / Pay-out Ratio
Dividend per share in Year 0 (D0) = $1.35 per share
Dividend per share in Year 1 (D1) = $1.5255 per share [$1.35 x 113%]
Dividend per share in Year 2 (D2) = $1.7238 per share [$1.5255 x 113%]
Dividend per share in Year 3 (D3) = $1.9479 per share [$1.7238 x 113%]
Dividend per share in Year 4 (D4) = $2.2011 per share [$1.9479 x 113%]
Dividend per share in Year 5 (D5) = $2.4873 per share [$2.2011 x 113%]
Earnings per share (EPS) in Year 5 = D5 / Pay-out Ratio
= $2.4873 per share / 0.35
= $7.1065 per share
Target stock price in five years = Earnings per share (EPS) in Year 5 x Benchmark P/E Ratio
= $7.1065 per share x 25 Times
= $177.66 per share
“Hence, Target stock price in five years will be $177.66”
Requirement (b) - Stock price today
The stock price today is the aggregate of present value of future dividends and the price at the end of 5th year
|
Year |
Cash flow ($) |
Present Value factor at 11.50% |
Stock price ($) |
|
1 |
1.5255 |
0.89686 |
1.37 |
|
2 |
1.7238 |
0.80436 |
1.39 |
|
3 |
1.9479 |
0.72140 |
1.41 |
|
4 |
2.2011 |
0.64699 |
1.42 |
|
5 |
2.4873 |
0.58026 |
1.44 |
|
5 |
177.66 |
0.58026 |
103.09 |
|
TOTAL |
110.12 |
||
“Hence, the Stock price today will be $110.12”
NOTE
The Formula for calculating the Present Value Factor is [1/(1 + r)n], Where “r” is the Discount/Interest Rate and “n” is the number of years.
Add Answer to:
In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the...
In practice, a common way to value a share of stock when a company pays dividends...
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 $1.75. The dividends are expected to grow at 21 percent over the next five years. In five years, the estimated payout ratio is 35 percent and the benchmark PE ratio is 33. a....
In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over th...
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 $1.19. The dividends are expected to grow at 14 percent over the next five years. The company has a payout ratio of 30 percent and a benchmark PE of 21. The required return...
In practice, a common way to value a share of stock when a company pays dividends...
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 $1.36. The dividends are expected to grow at 13 percent over the next five years. In five years, the estimated payout ratio is 40 percent and the benchmark PE ratio is 19. a....
In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the ne...
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 $1.18. The dividends are expected to grow at 13 percent over the next five years. The company has a payout ratio of 45 percent and a benchmark PE of 20. The required return...
In practice, a common way to value a share of stock when a company pays dividends...
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 $1.31. The dividends are expected to grow at 16 percent over the next five years. The company has a payout ratio of 30 percent and a benchmark PE of 19. The required return...
In practice, a common way to value a share of stock when a company pays dividends...
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 $1.21. The dividends are expected to grow at 16 percent over the next five years. The company has a payout ratio of 40 percent and a benchmark PE of 23. The required return...
In practice, a common way to value a share of stock when a company pays dividends...
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 o. Suppose a company just paid a dividend of $1.17. The dividends are expected to grow at 12 percent over the next five years. The company has a payout ratio of 40 percent and a benchmark PE of 19. The required return...
In practice, a common way to value a share of stock when a company pays dividends...
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 $1.34. The dividends are expected to grow at 19 percent over the next five years. In five years, the estimated payout ratio is 45 percent and the benchmark PE ratio is 22. After...
In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the nex...
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...
If you look at stock prices over any year, you will find a high and low...
If you look at stock prices over any year, you will find a high and low stock price for the year. Instead of a single benchmark PE ratio, we now have a high and low PE ratio for each year. We can use these ratios to calculate a high and a low stock price for the next year. Suppose we have the following information on a particular company: Year 1 Year 2 Year 3 Year 4 High price $...
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 $1.75. The dividends are expected to grow at 21 percent over the next five years. In five years, the estimated payout ratio is 35 percent and the benchmark PE ratio is 33. a....
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 $1.19. The dividends are expected to grow at 14 percent over the next five years. The company has a payout ratio of 30 percent and a benchmark PE of 21. The required return...
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 $1.18. The dividends are expected to grow at 13 percent over the next five years. The company has a payout ratio of 45 percent and a benchmark PE of 20. The required return...
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 $1.31. The dividends are expected to grow at 16 percent over the next five years. The company has a payout ratio of 30 percent and a benchmark PE of 19. The required return...
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 o. Suppose a company just paid a dividend of $1.17. The dividends are expected to grow at 12 percent over the next five years. The company has a payout ratio of 40 percent and a benchmark PE of 19. The required return...
Most questions answered within 3 hours.
-
A failure of an engine control unit causes it to fail an average
of 0.1 times...
asked 5 minutes ago -
A siren on an emergency car moving with velocity 90 km/hour
produces the sound with frequency...
asked 6 minutes ago -
Consider the schema below that models a bank’s branches,
customers and their accounts and loans. Provide...
asked 13 minutes ago -
What kinds of policies should be considered when individuals
decisions may likely impact public expense? For...
asked 22 minutes ago -
The financial statements of Apple Inc. show the following
numbers for fiscal year 2017 ($000,000):
Revenue...
asked 27 minutes ago -
Suppose that you are given the following results. Find the
correlation coefficient of the data.
sx...
asked 36 minutes ago -
The width of a tool used for semiconductor manufacturing
is assumed to be normally distributed with...
asked 38 minutes ago -
A
runaway train car that has a mass of 1,400 kg travels at a speed of...
asked 42 minutes ago -
The expected abnormal earnings of a firm that has earnings of
$40,000 with a required equity...
asked 41 minutes ago -
A spherical surface completely surrounds a collection of
charges. Find the electric flux through the surface...
asked 56 minutes ago -
Two capacitors with capacitances of 12 and 18.1 µF,
respectively, are connected in parallel. The system...
asked 43 minutes ago -
Let's say you are a small business owner that provides
business-to-business software-as-a-service to non-profit
organizations. Your...
asked 47 minutes ago