In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next five years or so, then find the “terminal” stock price using a benchmark PE ratio. Suppose a company just paid a dividend of $1.17. The dividends are expected to grow at 12 percent over the next five years. In five years, the estimated payout ratio is 40 percent and the benchmark PE ratio is 19. After five years, the earnings are expected to grow at 7 percent per year. The required return is 12 percent.
What is the target stock price in five years?
What is the stock price today?