Suppose That a Firm's Recent Earnings Per Share and Dividends

question 75

Multiple Choice

Suppose that a firm's recent earnings per share and dividends per share are $2.50 and $1.00, respectively. Both are expected to grow at 10 percent. However, the firm's current P/E ratio of 22 seems high for this growth rate. The P/E ratio is expected to fall to 18 within five years. Compute a value for this stock by first estimating the dividends over the next five years and the stock price in five years. Then discount these cash flows using a 14 percent required rate.

• A) $37.51
• B) $37.64
• C) $42.14
• D) $72.47

---

Definitions:

Globalization

Globalization is the process of increased interconnectedness and interdependence among countries, particularly in terms of economic, cultural, and political exchanges, facilitated by advances in communication and transportation technologies.

Populations

Groups of individuals belonging to the same species that live in a shared region and interbreed.

Modernization

The transition from traditional to contemporary forms of society, often characterized by technological, social, and economic changes.

Subprocesses

The distinct and smaller sequences of activities or steps that form part of a larger process or operation.