P/E Model and Cash Flow Valuation

Suppose that a firm’s recent earnings per share and dividend per share are $2.50 and $1.30, respectively. Both are expected to grow at 8 percent. However, the firm’s current P/E ratio of 22 seems high for this growth rate. The P/E ratio is expected to fall to 18 within five years.

Compute the dividends over the next five years. (Do not round intermediate calculations and round your final answers to 3 decimal places.)

Dividends years

First year $ ?

Second year $ ?

Third year $ ?

Fourth year $ ?

Fifth year $ ?

Compute the value of this stock in five years. (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Stock price $ ?

Calculate the present value of these cash flows using a 10 percent discount rate. (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Present value $ ?