Question

In: Finance

 Assume the​ following: • the​ investor's required rate of return is 18 ​percent, • the expected...

 Assume the​ following:

• the​ investor's required rate of return is 18 ​percent,

• the expected level of earnings at the end of this year ​(E1​) is ​$9​,

• the retention ratio is 55 ​percent,

• the return on equity ​(ROE​) is 19 percent​ (that is, it can earn 19 percent on reinvested​ earnings), and

• similar shares of stock sell at multiples of 5.960 times earnings per share.

QUESTIONS:

a.  What is the expected growth rate for​ dividends? (?)​% ​ (Round to two decimal​ places.)

b.  What is the price earnings ratio ​(P​/E1​) (?) ​ (Round to three decimal​ places.)

c.  What is the stock price using the ​P/E ratio valuation​ method? ​$ (?)​ (Round to the nearest​ cent.)

d.  What is the stock price using the dividend discount​ model? ​$ (?)​ (Round to the nearest​ cent.)

e.  Using the dividend discount​ model, what would be the stock price if the firm could earn 24​% on reinvested earnings ​(ROE​)? ​$ (?) (Round to the nearest​ cent.)

What would be the ​P/E ratio ​(P​/E1​) if the firm could earn 24​% on reinvested earnings ​(ROE​)? (?) (Round to three decimal​ places.)

f.  What does this tell you about the relationship between the rate the firm can earn on reinvested earnings and ​P/E​ ratios? ​ (Select from the​ drop-down menus.) The higher the ROE​, other things being the​ same, the (lower / higher) the value of the common stock and thus the (lower / higher) the price earnings​ ratio, ​P/E.

Solutions

Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 2 years ago
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