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(Common stock valuation) Assume the following: - the investor's required rate of return is 12 percent. - the expected level of eamings at the end

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(Common stock valuation) Assume the following: - the investor's required rate of return is 12 percent. - the expected level of eamings at the end of this year (E1) is $8, - the retention ratio is 45 percent, - the return on equity (ROE) is 15 percent (that is, it can earn 15 percent on reinvested earnings), and - similar shares of stock sell at multiples of 10.476 times eamings per share. Questions: a. Determine the expected growth rate for dividends. b. Determine the price earnings ratio (PIE1). c. What is the stock price using the PiE ratio valuation method? d. What is the stock price using the dividend discount model? 6. What would happen to the P/E ratio (PiE1) and stock price if the company increased its retention rate to 70 petcent (holding all else constant)? What would happen to the P/E rato (PIE ) and stock price if the company paid out all its earnings in the form of dividends? 1. What have you learned about the relationship botween the retention rate and the P/E ratios

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