Suppose that a firm’s recent earnings per share and dividend per share are $2.60 and $1.60, respectively. Both are expected to grow at 10 percent. However, the firm’s current P/E ratio of 25 seems high for this growth rate. The P/E ratio is expected to fall to 21 within five years.
Compute the dividends over the next five years. (Do not round intermediate calculations. Round your answers to 3 decimal places.)
Compute the value of this stock in five years. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Calculate the present value of these cash flows using a 12 percent discount rate. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
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