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
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jeff jeffy answered 2 years agoRelated Solutions
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