Suppose that a firm’s recent earnings per share and dividend per share are $2.80 and $1.90, respectively. Both are expected to grow at 11 percent. However, the firm’s current P/E ratio of 20 seems high for this growth rate. The P/E ratio is expected to f
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suppose_that_a_firm.docxSuppose that a firm’s recent earnings per share and dividend per share are $2.80 and $1.90, respectively. Both are expected to grow at 11 percent. However, the firm’s current P/E ratio of 20 seems high for this growth rate. The P/E ratio is expected to fall to 16 within 5 years
Solution:
Both are expected to grow at 11 percent
Under these two scenarios
(
)
(
)
(
)
36
.
94
$
11
.
0
1
80
.
2
$
20
1
5
0
5
=
+
´
´
=
+
´
´
=
n
n
g
E
E
P
P
(
)
(
)
(
)
22
.
51
$
11
.
0
1
90
.
1
$
16
1
5
0
5
=
+
´
´
=
+
´
´
=
n
n
g
E
E
P
P
