In the essay problem below, you are to determine the price that you would be willing to pay for a stock with the ticker symbol XYZ given the following. (i.e. what is the Present Value of the Future expected Returns). Assume a MARR=20%
Assume Now=Jan 2004
XYZ Earnings in 2004 = $1,000,000
XYZ Outstanding shares = 1,000,000
XYZ Diluted Shares = 1,500,000
XYZ Dividend (annual for 2004) = $0.25 (actual paid Dec 2004)
1) What is the PV of the dividends for the next 3 years (including 2004, 2005, 2006) assuming that they grow at a compounded annual rate of 35% (starting Jan 1 2005)?
2) Assume that the earnings continue to increase at 35% per year for the next 2 years and that no new shares (diluted) outstanding are added (therefore total diluted shares outstanding 3 years from now will be 1,500,000). If you expect the PE Ratio for XYZ three years from now (end 2006) to be 20, then what would the stock price for XYZ be?
3) Using the Dividends and Future stock price from the prior two questions, what maximum price/share would you be willing to pay for XYZ today?