Question
ABC company retains about half of its earnings each year and pays the rest out as dividend. Recently, the company paid a $3.25 dividend. Investors
ABC company retains about half of its earnings each year and pays the rest out as dividend. Recently, the company paid a $3.25 dividend. Investors expect the company's dividends to grow modestly in the future, about 4 per cent per year, and they require a 9 percent return on ABC shares.
(I) Based on next year's earning forecast, what is ABC's price/earning ratio (P/E) ratio ? ( Show complete workings)
(ii) Retaining the original assumption of 4% growth, how would the price/earning ratio change if investors became convinced that ABC was not a very risky and were willing to accept a 7% return on their shares going forward?
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Introduction to Corporate Finance What Companies Do
Authors: John Graham, Scott Smart
3rd edition
9781111532611, 1111222282, 1111532613, 978-1111222284
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