Question
ONLY NEEDING HELP WITH E AND F PLEASE. CORRECT ANSWERS FOR A - D PROVIDED BELOW. Thanks so much for your help! (Common stock valuation)Assume
ONLY NEEDING HELP WITH E AND F PLEASE. CORRECT ANSWERS FOR A - D PROVIDED BELOW. Thanks so much for your help!
(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 (E1) is $14,
the retention ratio is 35 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 9.155 times earnings per share.
Questions:
a.Determine the expected growth rate for dividends. ANSWER: 4.9%
b.Determine the price earnings ratio (P/E1). ANSWER: 9.155
c.What is the stock price using the P/E ratio valuation method? ANSWER: 128.17
d.What is the stock price using the dividend discount model? ANSWER: 128.17
e.Using the dividend discount model, what would be the stock price if the company increased its retention rate to 80% (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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