Using the P/E ratio approach to valuation, calculate the value of a share of stock under the
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• The investor’s required rate of return is 12 percent,
• The expected level of earnings at the end of this year (E1) is $4.00,
• The firm follows a policy of retaining 30 percent of its earnings,
• The return on equity (ROE) is 15 percent, and
• Similar shares of stock sell at multiples of 13.3325 times earnings per share.
Now show that you get the same answer using the discounted dividend model.
Dividend
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...
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Related Book For
Financial Management Principles and Applications
ISBN: 978-0133423822
12th edition
Authors: Sheridan Titman, Arthur Keown, John Martin
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