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jekas [21]
3 years ago
15

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 $1.75. The dividends are expected to grow at 21 percent over the next five years. In five years, the estimated payout ratio is 35 percent and the benchmark PE ratio is 33.
Business
1 answer:
Lyrx [107]3 years ago
7 0

Answer:

  1. $427.97
  2. $223.22

Explanation:

1. Target stock price in 5 years

First find the dividend in the 5th year;

= 1.75 * ( 1 + 21%)⁵

= $4.5390493

The calculate Earnings per Share;

= Dividend in 5th year/ Payout ratio

= 4.5390493 / 35%

= $12.968712

Now calculate the Share price;

= PE ratio * EPS

= 33 * 12.968712

= $427.97

2. Stock Price today assuming required return rate of 15%

This is the present values of all the dividends in addition to the stock price in 5 years.

= \frac{1.75 * 1.21}{1.15} + \frac{1.75 * 1.21^{2} }{1.15^{2} } + \frac{1.75 * 1.21^{3} }{1.15^{3}} + \frac{1.75 * 1.21^{4} }{1.15^{4} } + \frac{1.75 * 1.21^{5} }{1.15^{5} } + \frac{427.967 }{1.15^{5} }\\\\= 1.841304 + 1.9373724 + 2.0384526999 + 2.374451111856 + 2.2567097149 + 212.775235875\\\\= 223.2235258

= $223.22

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Helga [31]

The future value of the car that costs $25,000 today in 5 years at an inflation rate of 3% per year is <u>$28,981.85.</u>

<h3>What is the future value?</h3>

The future value shows the value that a present value will be in a future period, given the time value of money concept.

The future value can be computed using the future value formula, future value table, or an online finance calculator as below.

<h3>Data and Calculations:</h3>

Price of a car today = $25,000

Period to buy the car = 5 years

Inflation rate per year = 3%

Future value factor of 3% for 5 years = 1.159

Future price of the car in 5 years' time = $28,975 ($25,000 x 1.159)

N (# of periods) = 5 years

I/Y (Interest per year) = 3%

PV (Present Value) = $25,000

PMT (Periodic Payment) = $0

<u>Results:</u>

FV = $28,981.85

Total Interest $3,981.85

Thus, the future value of the car that costs $25,000 today in 5 years at an inflation rate of 3% per year is <u>$28,981.85.</u>

Learn more about future value computations at brainly.com/question/989421

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