( Relative valuation of common stock). Using P/E ratio approach to valuation calculate the value of a share of stock under the following conditions. .

The investor require rate of return is 14 percent,

. the expected level of earnings at the end of this year( E1) is $ 6.

the firm follow a policy of retaining 40 percent of its earnings,

.the return on equity ( ROE) is 13 percent and

. similar shares of stock sell at multiple of 8.108 times earnings per share

Now show that you get same answer using the discounted dividends model .

a) The stock price using the P/E ratio valuation method is ( around to nearest cent)

b) The stock price using the dividends discount model is ( around to nearest cent)