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Unformatted text preview: P t = D (t+1) / (R – g) D (t+1) = $5 × 1.04 × 1.04 × 1.04, or D (t+1) = $5 × (1.04) 3 D (t+1) = $5 × 1.124864 D (t+1) = $5.62 P t = D (t+1) / (R  g) P t = ($5.62 × 1.04) / (.20 – .04) P t = $5.84 / (.16) P t = $36.53 D. Alternate Approaches – P/E Ratio Value of equity: (P ) = (P 0 / E 1 ) × E 1 Terms are defined as: P 0 = Price or value today. E 1 = Expected earnings in one year. C O N C E P T E X A M P L E The P/E ratio is an identity formula that focuses on the relationships that will later serve as a basis to forecast share price. Assume Baker Corporation has a current price of $10 and anticipates earnings per share in the coming year of $2 based on current year earnings per share of $1.50. Using price earnings formulas, we would confirm the value of Baker's stock as follows: (P ) = (P 0 / E 1 ) × E 1 (P ) = ($10 / $2) × $2 (P ) = 5 × $2 (P ) = $10...
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This note was uploaded on 09/25/2011 for the course ACCOUNTING AC591 taught by Professor W during the Spring '11 term at Keller Graduate School of Management.
 Spring '11
 W

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