K (Common stock valuation) Assume the following: the investor's required rate of return is 13.5 percent, the expected level of earnings at the end of this year (E) is $10, the retention ratio is 50 percent, the return on equity (ROE) is 14 percent (that is, it can earn 14 percent on reinvested earnings), and similar shares of stock sell at multiples of 7.692 times earnings per share. Questions: a. Determine the expected growth rate for dividends. b. Determine the price earnings ratio (PIE). c. What is the stock price using the P/E ratio valuation method? d. What is the stock price using the dividend discount model? 4 e. What would happen to the P/E ratio (P/E) and stock price if the company innnnnnd its rotantion rate to 70 norant (holding all ales constant? What would ELLOS a. What is the expected growth rate for dividends? the return on equity (ROE) is 14 percent (that is, it can earn 14 percent on reinvested earnings), and similar shares of stock sell at multiples of 7.692 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? a. What is the expected growth rate for dividends? a. What is the expected growth rate for dividends? 7.00% (Round to two decimal places.) b. What is the price earnings ratio (PIE)? 7.14 (Round to three decimal places.) c. What is the stock price using the P/E ratio valuation method? 71.40 (Round to the nearest cent.) d. What is the stock price using the dividend discount model? $49.38 (Round to the nearest cent.) e. (i) Using the dividend discount model what K the return on equity (ROE) is 14 percent (that is, it can earn 14 percent on $49.38 (Round to the nearest cent.) e. (i) Using the dividend discount model, what would be the stock price if the company increased its retention rate to 70% (holding all else constant)? (Round to the nearest cent.) What would be the P/E ratio (P/E) if the company increased its retention ratio to 70% (holding all else constant)? (Round to three decimal places.) e. (ii) Using the dividend discount model, what would be stock price if the company paid out all its earnings in the form of dividends? (Round to the nearest cent.) ) 7 4 K the return on equity (ROE) is 14 percent (that is, it can earn 14 percent on C. (11/ wolly IN CIVICI THOUGH, WHICH WOULD LOOK PRO company paid out all its earnings in the form of dividends? $ (Round to the nearest cent.) What would be the P/E ratio (P/E,) and stock price if the company paid out all its earnings in the form of dividends? (Round to three decimal places.) f. What have you learned about the relationship between the retention ratio and the P/E ratio? (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 earnings ratio, P/E. the price 4