Using the P/E ratio approach to valuation, calculate the value of a share of stock under the following conditions:
• The investor’s required rate of return is 12 percent,
• The expected level of earnings at the end of this year (E1) is $4.00,
• The firm follows a policy of retaining 30 percent of its earnings,
• The return on equity (ROE) is 15 percent, and
• Similar shares of stock sell at multiples of 13.3325 times earnings per share.
Now show that you get the same answer using the discounted dividend model.