Suppose that Cash Cow Inc. has a current price-to-earnings ratio (P/E) of 10X. The company earned $2.00/share last year and had a plowback ratio of .25. The low plowback reflects a low return on equity (ROE) of 8%. If the company can increase its ROE to 12% through an acquisition but needs to self-fund by cutting the dividend, what would be the new P/E ratio? (Assume that the new plowback is .75 and the cost of capital is 10%.)

8.3X

25X

17.5X

32X