In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next 5 years or so, then find the terminal stock price using a benchmark PE ratio. Suppose a company just paid a dividend of $1.41. The dividends are expected to grow at 13% over the next 5 years. In the 5 years, the estimated payout ratio is 30% and the benchmark  PE ratio is 19. What is the target stock price in 5 years? What is the stock price today assuming a required return of 11% on this stock?

Q: In practice, a common way to value a share of a stock when a company pays dividends is to value the…

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A:

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