Question
2 Over the past few years, Company A has retained, on the average, 70 percent of its earnings in the business. The future retention rate
2 Over the past few years, Company A has retained, on the average, 70 percent of its earnings in the business. The future retention rate is expected to remain at 70 percent of earnings, and long-run earnings growth is expected to be 10 percent. If the risk-free rate, kRF, is 8 percent, the expected return on the market, kM, is 12 percent, Company A's beta is 2.0, and the most recent dividend, D0, was $1.50, what is the most likely market price and P/E ratio (P0/E1) for Company A's stock today? (Hint: Start by finding the required rate of return for Company A's investors.)
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