Question

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The market-capitalization rate on the stock of Flexsteel Company is 12%. The expected ROE is 13%,...

The market-capitalization rate on the stock of Flexsteel Company is 12%. The expected ROE is 13%, and the expected EPS are $3.60. If the firm's plowback ratio is 50%, the P/E ratio will be

Expert Solution

The P/E ratio will be?

Answer: 4.17 times

Working

Formula for calculating P/E ratio is as follows;

P/E ratio = Price per share ÷ Earning per share.

Where,

Earnings per share = $3.60

Price per share = Dividend per share ÷ market capitalization rate

= $1.80 ÷ 0.12

= $15

Dividend per share = Earnings per share * (1 – plowback ratio)

= $3.60 * (1 – 50%)

= $1.80

Market capitalization rate = 12%

P/E ratio = Price per share ÷ Earning per share.

= $15 ÷ $3.60

= 4.17 Times

jeff jeffy answered 2 years ago

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