Assume the following: The investors required rate of return is 15 percent, The expected level
Question:
Assume the following:
• The investor’s required rate of return is 15 percent,
• The expected level of earnings at the end of this year (E1) is $5.00,
• The retention ratio is 50 percent,
• The return on equity (ROE) is 20 percent (that is, it can earn 20 percent on reinvested earnings), and Similar shares of stock sell at multiples of 10 times earnings per share.
a. Determine the expected growth rate for dividends.
b. Determine the price/earnings ratio (P/E1) using Equation (10–5a).
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/E1) and stock price if the firm could earn 25 percent on reinvested earnings (ROE)?
f. What does this tell you about the relationship between the rate the firm can earn on reinvested earnings and P/E ratios?
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
Step by Step Answer:
We know the following about a stock A From equation 103 we know that we can find the firms growth ra...View the full answer
Financial Management Principles and Applications
ISBN: 978-0133423822
12th edition
Authors: Sheridan Titman, Arthur Keown, John Martin
