Castle-in-Sand generates a rate of return of on its investments and maintains a plowback ratio of Its earnings this year will be per share. Investors expect a rate of return on the stock.
Required:
(a.) Find the price and ratio of the firm.
(b.) What happens to the P/E ratio if the plowback ratio is reduced to 0.20? Why?
(c.) Show that if plowback equals zero, the earnings-price ratio, E/P, falls to the expected rate of return on the stock.