# Question

Using the P/E ratio approach to valuation, calculate the value of a share of stock under the following conditions:

• 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.

• 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.

## Answer to relevant Questions

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