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Problem 8-04

You have been reading about the Madison Computer Company (MCC), which currently retains 90 percent of its earnings ($6 a share this year). It earns an ROE of almost 32 percent.

1. Assuming a required rate of return of 14 percent, how much would you pay for MCC on the basis of the earnings multiplier model? Do not round intermediate calculations. Round your answer to the nearest cent. Enter zero if the obtained answer is economically meaningless.

   $

2. What would you pay for Madison Computer if its retention rate was 64 percent and its ROE was 18 percent? Do not round intermediate calculations. Round your answer to the nearest cent. Enter zero if the obtained answer is economically meaningless.

   $