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exis [7]
3 years ago
5

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 y

ears or so, then find the "terminal" stock price using a benchmark PE ratio. Suppose a company just paid a dividend of $1.17. The dividends are expected to grow at 12 percent over the next five years. The company has a payout ratio of 40 percent and a benchmark PE of 19. The required return is 12 percent. What is the target stock price in five years?
What is the stock price today?
Business
1 answer:
svlad2 [7]3 years ago
3 0

Answer:

Stock Price in 5 years: $97.94. Stock Price Today: $55.575

Explanation:

A pay-out ratio is computed by dividing dividends per share over earnings per share. Meanwhile, PE or Price-Earnings Ratio is computed by dividing the market value of stocks over earnings per share. Thus, using the pay-out ratio formula, the earnings per share is 2.925 ($1.17/40%) and using the PE ratio formula, the market price of stocks today is $55.575 (19 x 2.925). After 5 years, multiplying 1.17 and 12% rate raised to the 5th power, the dividend will amount to $5.1548. Using pay-out ratio, earnings per share is 5.1548 ($2.0619/40%) and the market price of stock after 5 years is $97.94 ($5.1548 x 19).

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soldi70 [24.7K]

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We can actually deduce here that a plant asset trade-in with commercial substance means that it changes the company's: Future cash flows.

<h3>What is cash flow?</h3>

In Business, cash flows actually refers to the amount of the net cash and its equivalent that is actually being moved or transferred in and out of the company.

When cash is received by the company or organization, it is said to be cash inflow while the cash that is being spent to run the daily to day activities of the company are known as cash outflow.

Thus, we see that a plant asset trade-in with commercial substance means that it changes the company's  future cash flows. The future cash flow is the expected inflow and outflow of cash in the future.

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