XYZ stock has an expected ROE of 10%per year expected earnings per share of$5 and

expected dividends of$2per share.Its market capitalization rate is 12%per year.

a. What are the firm's price and price-earnings ratio?(10%)

b.If the firm increases its plow back ratio to 0.8 what would be its price and price-

earnings ratio?(5%)

Compare the results of(a) and(b) to explain the effect of the plow back ratio on the price-earnings ratio.