Consider Twitter's current stock price: $108.89. Current earnings per share, EPS = $1.29
a) If next year’s earnings are expected to be $3.14, what is the forward P/E ratio of the stock?
b) Assume that Twitter is expected to pay no dividends for the next 5 years. After 5 years, the company’s payout ratio is expected to be 50%. Earnings are expected to grow from $1.29 per share to $35.00 per share by the end of year 5. Using the dividend discount model and an equity cost of capital of 20%, given the current price, what are investors’ expectations of Twitter’s earnings growth after 5 years?
c) If the Fed tightens interest rates by 3% and the equity cost of capital rises by the same amount, using the dividend discount model, what is the effect on Twitter’s current stock price?