DEF Ltd paid $10 of cash dividend to its shareholders. The dividend is expected to grow at 25% per year for the next five years and then settle down to 5% per year indefinitely.
JKL Ltd has a dividend payout ratio of 40%. Its expected earnings per share (EPS1) to be $8 at the end of the first year and the company has a 4% dividend growth rate.
Assume a 12% required rate of return on common stock for the three companies.
a. Regarding to DEF Ltd, find out the expected dividend from year one to year five? What is the stock price of the company at the end of year five (P5)? Also, compute the current stock price (P0) of the company?
b. Regarding to JKL Ltd, what is the current stock price? What is the expected price-earnings ratio (P/E1)?