Question

Target Co is expected to pay $2.4, $2.8 and $2.9 in dividends per share over the next three years. The company’s earnings per share is expected to be $6 in three years of which $2.9 will be paid in dividends. Suppose Target’s stock is expected to sell for 20 times earnings in three years. Given a required rate of return 12%, what should be the current stock price?

What do you expect the price to be next year once the $2.4 dividends per share have been paid? What is next year's stock price?

Answer 1

Price of Stock = PV of CFs from it.

P3 = EPS3 * PE ratio

= 6 * 20

= $ 120

Price Today :

Year	CF	PVF @12%	Disc CF
1	$      2.40	0.8929	$      2.14
2	$      2.80	0.7972	$      2.23
3	$      2.90	0.7118	$      2.06
3	$ 120.00	0.7118	$   85.41
Price Today			$   91.85

Price after 1 Year = PV of Future Cfs from there

Year	CF	PVF @12%	Disc CF
1	$      2.80	0.8929	$      2.50
2	$      2.90	0.7972	$      2.31
2	$ 120.00	0.7972	$   95.66
Price after 1 year			$ 100.48