Company XYZ is expected to pay a dividend of $5 a year from now. This dividend is expected to grow at 10% for the next two years and at 5% forever after. The return that investors expect on XYZ is 12%. XYZ’s payout ratio is 0.3. (a) Determine XYZ’s stock price. (b) Determine XYZ’s PVGO. (c) Determine XYZ’s P/E ratio. (d) What will be the P/E ratio of XYZ in one year from now? (e) To see how sensitive your conclusions are to the assumption about discount rates, re-compute your answers to previous questions assuming that the required rate of return on XYZ is either 10% or 14%.
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