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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
14.5%
the expected level of earnings at the end of this year
(E1) is $8,
the retention ratio is 40%
the return on equity (ROE) is 12%(that is, it can earn
12% on reinvested earnings), and
similar shares of stock sell at multiples of 6.185
times earnings per share.
Questions:
a.Determine the expected growth rate for dividends.
b.Determine the price earnings ratio (P/E1).
c.What is the stock price using the P/E ratio valuation method?
d.What is the stock price using the dividend discount model?
e.What would happen to the P/E ratio (P/E1) and stock price if the company increased its retention rate to 75%(holding all else constant)? What would happen to the P/E ratio (P/E1) 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 P/E ratios?

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