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

question 6

Multiple Choice

Suppose that a firm's recent earnings per share and dividends per share are $3.00 and $1.50, respectively. Both are expected to grow at 10 percent. However, the firm's current P/E ratio of 20 seems high for this growth rate. The P/E ratio is expected to fall to 16 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) $31.68
• B) $40.15
• C) $46.89
• D) $60.00