A firm has an expected dividend payout ratio of 60%, a required rate of return of 11%, and an expected dividend growth rate of 5%. If you expect next year’s earnings (E1) to be $3.50, what is the value of the stock today? A) $35.00 B) $58.33 C) $17.50 Using the information above, calculate the firm’s expected P/E ratio A) 10 B) 6 C) 5

A A

- [(3.50*0.6)/0.11-.05)=35 2. (0.6/0.11-0.05)=10

for the benefit of others; P/E = div.payout / (discountrate - sustainedgrowthrate) = 0.6 / (0.11 - 0.05) = 10 Earnings Multiplier Approach; Stock value = expected earnings x P/E = 3.50 x 10 = $35 DDM Approach As it says expected earnings… EPS x Div.payout 3.50 x 0.6 = 2.10 DDM = Div / K-G = 2.10 / 0.11-0.05 = $35