(Using relative valuation for common stock) (Related to Checkpoint 10.2 on page 345) Using the P/E ratio approach to valuation, calculate the value of a share of stock under the following conditions:

• The investor’s required rate of return is 12 percent.

• The expected level of earnings at the end of this year (E1) is $4.00.

• The firm follows a policy of retaining 30 percent of its earnings.

• The return on equity (ROE) is 15 percent.

• Similar shares of stock sell at multiples of 13.3325 times earnings per share.

Now show that you get the same answer using the discounted dividend model.