Assume that you have been asked to estimate the PE ratio for a firm which has...

  

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Assume that you have been asked to estimate the PE ratio for a firm which has the following characteristics: High Growth Phase Stable Growth Phase Length of Period 5 years Forever after year 5 Return on Equity 25% 15% Payout Ratio 20% 60% Beta 1.25 1.00 Cost of Equity 12.875% 11.50% The riskfree rate is 6% and the risk premium used is 5.5%. A. What is the growth rate of the firm for high growth phase? B. What is the growth rate of the firm for stable growth phase? C. What's your comment on the stable growth rate you get from the answer (B)? D. What is PE ratio of the firm using the answers (A) and (B)? Assume that you have been asked to estimate the PE ratio for a firm which has the following characteristics: High Growth Phase Stable Growth Phase Length of Period 5 years Forever after year 5 Return on Equity 25% 15% Payout Ratio 20% 60% Beta 1.25 1.00 Cost of Equity 12.875% 11.50% The riskfree rate is 6% and the risk premium used is 5.5%. A. What is the growth rate of the firm for high growth phase? B. What is the growth rate of the firm for stable growth phase? C. What's your comment on the stable growth rate you get from the answer (B)? D. What is PE ratio of the firm using the answers (A) and (B)?

Answer rating: 100% (QA)

A To calculate the growth rate for the high growth phase we use the formula Growth Rate ROE 1 Payout ... View the full answer