In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next five years or so, then find the “terminal” stock price using a benchmark PE ratio. Suppose a company just paid a dividend of $1.23. The dividends are expected to grow at 18 percent over the next five years. In five years, the estimated payout ratio is 30 percent and the benchmark PE ratio is 18. After five years, the earnings are expected to grow at 7 percent per year. The required return is 14 percent.
Required:
What is the target stock price in five years? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Stock price in 5 years $
What is the stock price today? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Stock price today $