(Common stock valuation) Assuime the following: - the inwestor's required rate of return is 13.5 percent, - the oxpected lovel of earnings at the end of this yeur (E1) is 58 , - the retention ratio is 30 percent, - the return on equity (ROE) is 14 percent (that is, it can earn 14 porcent on rotrvested exmings), and - simitiar shares of stock soll at malipies of 7.528 limes earnings per share. Questions: a. Determine the expecied growth rate for dividends b. Determine the price eaenings ratio (PE1) c. What is the ntock price using the P. E ratio valuation method? d. What is the stock price using the dividend disoount model? e. What would happen to the P.E rabo (PIE,) and stock price if the compary increased its retertion rate to 70 percent thoiding all elise corstarit? What woult haspen to the PIE ratio (P.E,) and stock price it the company paid out at its earrings in the form of dividends? 1. What have you leamed about the celationship between the retention rate and the PE ratios? a. What is the expected growth rate for dividends? 5. (Round to two decimal places.) b. What is the ptice eamings ratio (PE1) ? (Round to three decimal places.) c. What is the stock price using the P.E ratio valuation method? (Rourd to the nearest cent.) d. What is the stock price using the dividend discount model? (Roound to the nearest cent.) d. What is the stock price using the dividend discount model? (Round to the nearest cent.) e. (i) Using the dividend discount model, what would be the stock price if the company incteased its rotention fate to 70%6 (holding all eise constanti? (Round to the nearest cent.) What would be the P/E ratio (PiE1) it the company increased its retontion rafio to 70 sis (holding all else constant)? (Round to three decimal places.) e. (ii) Using the dividend discount model, what would be stock price if the comparry paid out all its eatnings in the form al dindentas? (Round to the nearest cent) What would be the P.E ratio (PE1) and stock price if tho company paid out all its eamings in the form of dividends? What would be the P.E ratio (PE1) it the company increased its retention raso to 70% (hoiding all else constant?? (Round to three decirnal places ) e. (ii) Using the dividend discount model, what would be stock price if the company paid out al its earmings in the form of dividends? (Round to the nearest oent.) What would be the PE ratio (PE1) and stock price if the company paid cut all is eamings in the form of dividends? (Round to three decimal places,) f. What have you learned about the relationship between the retention ratio and the PE rabo? (Select from the drop-down menus) Assume that the investor's required rate of return is greater than the dividend growth rate, the higher the retention ratio, other things being the same the the value of the common stock and thus the the price earnings ratio, P.E
