Suppose that a firm’s recent earnings per share and dividend per share are $2.80 and $1.80, respectively. Both are expected to grow at 8 percent. However, the firm’s current P/E ratio of 27 seems high for this growth rate. The P/E ratio is expected to fall to 23 within five years.
Compute the dividends over the next five years.
Calculate the present value of these cash flows using a 10 percent discount rate.