Question
the investor's required rate of return is 13.5 percent the expected level of earnings at the end of this year (E1) s $6, the retention
the investor's required rate of return is 13.5 percent the expected level of earnings at the end of this year (E1) s $6, the retention ratio is 40 percent, the return on equity (ROE) is 13 percent (that is, it can earn 13 percent on reinvested earnings), and similar shares of stocks sell at multiples of 7.228 times earnings per share Questions a. Determine the expected growth rate for the dividends. b. Determine the price earnings ratio (P/E1) c. What is the stock price using the P/E ratio valuation method? d. What is the stock price using the dividend discount model? e. What would happen to the P/E ratio (P/E (P/E1) and stock price if the company increase it retention rate to 75 percent (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 leaned about the relationship between the retention rate and the P/E ratios? a. What is the expected growth rate for dividends?.
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