Question #135
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 55
Status: Unattempted
Question
Q-Partners is expected to have earnings in ten years of $12 per share, a dividend payout ratio of 50%, and a required return of 11%. At that time, ROE is expected to fall to 8% in perpetuity and the trailing P/E ratio is forecasted to be eight times earnings. The terminal value at the end of ten years using the P/E multiple approach and DDM is closest to: P/E multiple DDM
Answer Choices:
A. 96.32 85.14
B. 96.00 89.14
C. 96.32 85.71
Explanation
Terminal Value
= P/E × EPS
= 8 × 12 = 96
D10 = 0.5 × 12 = 6
g = 0.50 × 0.08 = 4%
(Module 20.3, LOS 20.m)
P10 =
D10 (1 + g)
r −g
=
6 (1.04)
(0.11 −0.04)
= 89.14