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( Common stock valuation ) Assume the following: the investor's required rate of return is 1 4 . 5 % the expected level of earnings
Common stock valuation Assume the following:
the investor's required rate of return is
the expected level of earnings at the end of this year
E is $
the retention ratio is
the return on equity ROE is that is it can earn
on reinvested earnings and
similar shares of stock sell at multiples of
times earnings per share.
Questions:
aDetermine the expected growth rate for dividends.
bDetermine the price earnings ratio PE
cWhat is the stock price using the PE ratio valuation method?
dWhat is the stock price using the dividend discount model?
eWhat would happen to the PE ratio PE and stock price if the company increased its retention rate to holding all else constant What would happen to the PE ratio PE and stock price if the company paid out all its earnings in the form of dividends?
f What have you learned about the relationship between the retention rate and the PE ratios?
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