Question

Turner Compacts Ltd. is expected to pay a $2 dividend in one year. The required rate of return is 9 percent. The firm uses a dividend payout ratio of 25 percent. Calculate the leading P/E ratio in the following cases:

a. Expected growth rate = 4 percent

i. Today

ii. In one year (immediately after dividend paid)

b. Expected growth rate = 8 percent

i. Today

ii. In one ear (immediately after dividend paid)

c. If a firm is expected to have a constant dividend growth rate, do you expect the P/E ratio to change over time? Explain.