P/E Model and Cash Flow Valuation Suppose That a Firm's

question 2

Multiple Choice

P/E Model and Cash Flow Valuation 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

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