(Common stock valuation) Assume the following: the investor's required rate of return is 12.5 percent, the...
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(Common stock valuation) Assume the following: the investor's required rate of return is 12.5 percent, the expected level of earnings at the end of this year (E) is $14, the retention ratio is 30 percent, the return on equity (ROE) is 15 percent (that is, it can earn 15 percent on reinvested earnings), and similar shares of stock sell at multiples of 8.750 times earnings per share. a. What is the expected growth rate for dividends? % (Round to two decimal places.) b. What is the price earnings ratio (P/E)? (Round to three decimal places.) c. What is the stock price using the P/E ratio valuation method? (Round to the nearest cent.) d. What is the stock price using the dividend discount model? (Round to the nearest cent.) e. (i) Using the dividend discount model, what would be the stock price if the company increased its retention rate to 60% (holding all else constant)? (Round to the nearest cent.) What would be the P/E ratio (P/E) if the company increased its retention ratio to 60% (holding all else constant)? (Round to three decimal places.) e. (ii) Using the dividend discount model, what would be stock price if the company paid out all its earnings in the form of dividends? (Round to the nearest cent.) What would be the P/E ratio (P/E) and stock price if the company paid out all its earnings in the form of dividends? (Round to three decimal places.) (Common stock valuation) Assume the following: the investor's required rate of return is 12.5 percent, the expected level of earnings at the end of this year (E) is $14, the retention ratio is 30 percent, the return on equity (ROE) is 15 percent (that is, it can earn 15 percent on reinvested earnings), and similar shares of stock sell at multiples of 8.750 times earnings per share. a. What is the expected growth rate for dividends? % (Round to two decimal places.) b. What is the price earnings ratio (P/E)? (Round to three decimal places.) c. What is the stock price using the P/E ratio valuation method? (Round to the nearest cent.) d. What is the stock price using the dividend discount model? (Round to the nearest cent.) e. (i) Using the dividend discount model, what would be the stock price if the company increased its retention rate to 60% (holding all else constant)? (Round to the nearest cent.) What would be the P/E ratio (P/E) if the company increased its retention ratio to 60% (holding all else constant)? (Round to three decimal places.) e. (ii) Using the dividend discount model, what would be stock price if the company paid out all its earnings in the form of dividends? (Round to the nearest cent.) What would be the P/E ratio (P/E) and stock price if the company paid out all its earnings in the form of dividends? (Round to three decimal places.)
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