a) Firm A has systematic risk beta and ROE (return on equity) equal 0.8 and 7% respectively. The risk-free rate is 3% and the market risk premium is 6%. If firm A's next year EPS (earnings per share) and DPS (dividend per share) are £0.5 and £0.2 respectively, what is the firm's expected price-earnings multiple? How much dividend should the firm declare if it is to enjoy a higher expected PE (price-to-earnings) valuation? b) What are the pros and cons of the PE approach to valuation?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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a) Firm A has systematic risk beta and ROE (return on equity) equal 0.8 and 7% respectively. The risk-free rate is 3% and the market risk premium is 6%. If firm A's next year EPS (earnings per share) and DPS (dividend per share) are £0.5 and £0.2 respectively, what is the firm's expected price-earnings multiple? How much dividend should the firm declare if it is to enjoy a higher expected PE (price-to-earnings) valuation? b) What are the pros and cons of the PE approach to valuation?
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