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

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