(Common stock valuation) Assume the following: • the investor's required rate of retum is 16 percent, • the expected level of earnings at the end of this year (E,) is $9, • the retention ratio is 60 percent, • the return on equity (ROE) is 19 percent (that is, it can earn 19 percent on reinvested earnings), and • similar shares of stock sell at multiples of 8.696 times earnings per share. Questions: a. Determine the expected growth rate for dividends. b. Determine the price earnings ratio (PIE,). c. What is the stock price using the P/E ratio valuation method? What is the

(Common stock valuation) Assume the following: • the investor's required rate of retum is 16 percent, • the expected level of earnings at the end of this year (E,) is $9, • the retention ratio is 60 percent, • the return on equity (ROE) is 19 percent (that is, it can earn 19 percent on reinvested earnings), and • similar shares of stock sell at multiples of 8.696 times earnings per share. Questions: a. Determine the expected growth rate for dividends. b. Determine the price earnings ratio (PIE,). c. What is the stock price using the P/E ratio valuation method? What is the

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Description: (Common stock valuation) Assume the following:Chapter• the investor's required rate of return is 16 percent,• the expected level of earnings at the end of this year (E,) is $9,• the retention ratio is 60 percent,• the return on equity (ROE) is 19 pe

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 11P

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(Valuing common Stock) Assume the following: • The investor’s required rate of return is 15 percent. • The expected level of earnings at the end of this year (E1) is $5.00. • The retention ratio is 50 percent. • The return on equity (ROE) is 20 percent (that is, it can earn 20 percent on reinvested earnings). • Similar shares of stock sell at multiples of 10 times earnings per share. A. Determine the price/earnings ratio (P/E1) B. What is the stock price using the P/E ratio valuation method? C. What is the stock price using the dividend discount model? D. What would happen to the P/E ratio (P/E1) and stock price if the firm could earn 25 percent on reinvested earnings (ROE)? E. What does this tell you about the relationship between the rate the firm can earn on reinvested earnings and the P/E ratio?
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