P12.17 SOLUTION

From the constant-growth model, the amount of internally-funded growth is 12.5%

and a maximum P/E ratio of 20 would be paid for Merck under these circumstances.

Growth at a reasonable-price investors normally consider a PEG ratio of 1 to be the

maximum appropriate valuation for a growth stock, so MRK is not apt to appeal to

GARP investors:

In the solution, where does the 12.5% come from?