Question

Use the following information to answer questions 5, 6 and 7.

Alpha Corp. has a market capitalization rate of 12%, an ROE of 16% and a plowback ratio of 50%.

What is Alpha Corp's expected earnings growth rate?

Group of answer choices

12%

6%

4%

8%

Alpha Corp's P/E ratio is closest to:

12.5

2

8.3

6.25

Suppose Alpha Corp. decides to pay out 100% of its earnings. What will happen to its P/E ratio?

Group of answer choices

The P/E ratio will increase.

The P/E ratio will decrease.

The P/E ratio will remain constant.

Use the following information to answer questions 8, 9 and 10.

Beta Corp. has a market capitalization rate of 12%, an ROE of 10% and a plowback ratio of 80%.

What is Beta Corp's expected earnings growth rate?

Group of answer choices

8%

6%

4%

12%

Beta Corp's P/E ratio is closest to:

Group of answer choices

5

1.25

8.3

2.5

Answer 1

Answer:

Question 5- 8%
Alpha Corp's expected earnings growth rate = ROE * plowback ratio = 16% * 50% = 8%

Question 6- 12.5

Alpha Corp's P / E ratio = (1 - 0.50) / [0.12 - (0.16*0.50)]
P / E ratio = 12.5

Question 7- The P/E ratio will remain constant.
Payout ratio has no effect on the P/E ratio. P/E ratio is Price / EPS.

Question 8- 8%
Beta Corp's expected earnings growth rate = ROE * plowback ratio = 10% * 80% = 8%

Question 9- 5
Beta Corp's P / E ratio = (1 - 0.80) / [0.12 - (0.10*0.80)]
P/E ratio = 5