P/E Ratio Model and Future Price Walmart (WMT)recently earned a profit of $3.13 per share and has a P/E ratio of 14.22.The dividend has been growing at a 12.5 percent rate over the past few years.If this growth continues,what would be the stock price in five years if the P/E ratio remained unchanged? What would the price be if the P/E ratio declined to 10 in five years?

Question

Quizplus · Accepted Answer

First, we need to calculate the expected future earnings and dividends per share:
- Five years from now, the earnings per share would be: $3.13 * (1 + 0.125)^5 = $6.08
- The dividend per share would be: $3.13 * (1 + 0.125) * (1 + 0.125/2)^(5*2) = $2.70

Using the P/E ratio model, we can calculate the expected future stock price as follows:
- If the P/E ratio remains unchanged at 14.22, the future stock price would be: $6.08 * 14.22 = $86.46
- If the P/E ratio declines to 10, the future stock price would be: $6.08 * 10 = $60.80

Therefore, the answer is C) $80.20, $56.40 respectively, since the second option, $60.80 is the one that is closer to $56.40.

P/E Ratio Model and Future Price Walmart (WMT)recently Earned a Profit