a. Stock price in 5 years b. Stock price today

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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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 $2.00. The
dividends are expected to grow at 13 percent over the next five years. In five years, the
estimated payout ratio is 25 percent and the benchmark PE ratio is 38.
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 14 percent on this stock?
(Do not round intermediate calculations and round your answer to 2 decimal
places, e.g., 32.16.)
a. Stock price in 5 years
b. Stock price today
Transcribed Image Text: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 $2.00. The dividends are expected to grow at 13 percent over the next five years. In five years, the estimated payout ratio is 25 percent and the benchmark PE ratio is 38. 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 14 percent on this stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. Stock price in 5 years b. Stock price today
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