Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

(Common stock valuation) Assume the following: the investor's required rate of return is 12 percent, the expected level of earnings at the end of this

image text in transcribed

(Common stock valuation) Assume the following: the investor's required rate of return is 12 percent, the expected level of earnings at the end of this year (E) is $10, the retention ratio is 35 percent, the return on equity (ROE) is 16 percent (that is, it can earn 16 percent on reinvested earnings), and similar shares of stock sell at multiples of 10.156 times earnings per share. Questions: a. Determine the expected growth rate for dividends. b. Determine the price earnings ratio (P/E). 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/E) and stock price if the company increased its retention rate to 70 percent (holding all else constant)? What would happen to the P/E ratio (P/E) 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

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Offshore Finance And State Power

Authors: Andrea Binder

1st Edition

0192870122, 978-0192870124

More Books

Students also viewed these Finance questions