A firm projects an ROE of 20%; it will maintain a reinvestment ratio of 0.3. The firm is expecting earnings of R2 per shar e and investors expect a return of 12% on the investment.

Required:

2.1 Calculate the expected share price and the price-earnings (P/E) ratio of the firm. (11)

2.2 Using information above and your answer in 2.1, calculate dividend yield. (4)

2.3 Describe how a low dividend yield affects the earnings yield and the P/E ratio. (4)

2.4 Analyse the most important factors that would influence an investment analyst in the rating of P/E ratios.