Early in 2015, Mathew is analyzing shares of Janeff Corp.He expects the following dividends per share (end of year).
2015 $1.00
2016 $1.25
2017 $1.50
He expects 2017 earnings per share to be $4.50 and Janeff's P/E ratio to be 20.His required rate of return for this stock is 12%.He should pay no more than

Question

Quizplus · Accepted Answer

To find the maximum price Mathew should pay, calculate the present value of expected dividends and the present value of the stock price at the end of 2017. The stock price in 2017 is expected to be $4.50 (earnings) * 20 (P/E ratio) = $90. The present value of dividends and stock price, discounted at 12%, gives approximately $67.02.

Early in 2015, Mathew Is Analyzing Shares of Janeff Corp