Forward PE Approach

Assuming Pfizer (PFE)s ROE (return on equity) is 20%, long term sustainable EPS (Earnings-per-share)

growth rate is 4%, EPS1 (expected EPS next year) is $3, required rate of return k is 9%.

a. Show how to derive PEs implicit factor ROE and compute the PE1(forward P/E ratio at the end of next

time that is P0/E1).

b. How does PE ratio change if ROE increases, holding other factors constant?

c. How does dividend payout ratio change if ROE increases? How does plowback ratios change if ROE

increases?

e. Estimate the intrinsic value for the stock