Market analysts expect the earnings per share of JNM Ltd to be $1.80 next year. The...

Market analysts expect the earnings per share of JNM Ltd to be $1.80 next year. The earnings per share are expected to grow at 5% p.a. forever and the firm typically retains 60% of its earnings. Analysts believe that this policy will continue in the foreseeable future. If investors require a return of 9%, the company's expected (or forward) price-to-earnings ratio will be closest to:

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Expert Solution

Answer : Price-to-earning ratio = 10

Calculation :

Price of Share = Expected Dividend / (required return - growth rate )

Price of share = 1.80*(1-0.60) / ( 0.09 - 0.05 )

Price of share = 0.72 / 0.04 ==> 18

So,

Price earning ratio = Price of dhare / Earning per share

Price earning ratio = 18 / 1.8 ==> 10

jeff jeffy answered 2 years ago

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