- the investor's required rate of retum is 13.5 porcent, - the expected level of eamings at the end of this year (Ej) is $6, - the retention ratio it 50 percent. - the retum on equity (ROE) is 15 percent (that is, it can eam 15 percent on teivivested eamings). and - similar thares of stock sell at multiples of 8.333 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 PIE ratio valuation method? d. What is the stock price using the dividend divoount moder? 6. What would happen to the PAE tato (PEE, ) and stock price if the company increased lis retention raie to 60 percent (holding all else constanti? What would happen to fhe PE ratio (PrE, ) and stock price if the company paid out al its eamings in the form of dividends? 1. What have you learned about the relatonship between the retention rate and the PrE ration? a. What is the expected growth rate for dividends? W (Round to two decimal places.) b. What is the price earnings rabo (PIE 1 ? (Round to three decimal places.) c. What is the stock price using the P/E ratio valuation method? (Round to the nearest cent.) d. What is the slock price using the dividend discount model? (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 60% (holding all alse constant)? (Round to the nearest cent.) What would be the P/E ratio (PJ E1 ) if the company increased its retention ratio to 60% (holding all else constant)? (Round to three decimal places.). e. (ii) Using the dividend discount model, what would be stock price if the cornpany paid cut al its earnings in the form of dividends? (Round to the nearest cent.) What would be the P/E ratio (P/E 1 ) and stock price if the company paid out all its earnings in the form of dividends? (Round to three decimal places.) 4. What have you leamed about the relationship between the relention ratio and the AE rabo? (5elect trom the drop-down menua) Assume that the investor's required rate of rotum is greator than the dividend growth rate, the higher the retertion rasio, other things being the samie, the thus the the price earnings retio. PIE