(Common stock valuation) ASsume the following:• the investor's required rate of return is 14 percent,• the expected level of earnings at the end of this year (E,) is $14,• the retention ratio is 30 percent,• the return on equity (ROE) is 16 percent (that is, it can earn 16 percent on reinvested earnings), and• similar shares of stock sell at multiples of 7.609 times earnings per share.Questions:a. Determine the expected growth rate for dividends.b. Determine the price earnings ratio (PIE1).c. What is the stock price using the P/E ratio valuation method?d. What is the stock price using the dividend discount model?e. What would happen to the P/E ratio (PIE,) and stock price if the company increased its retention rate to 70 percent (holding all else constant)? What would happen to the P/E ratio (PIE,) and stock price if the company paid out all its earnings in the form ofdividends?f. What have you learned about the relationship between the retention rate and the P/E ratios?

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Common stock valuation) Assume the following: the investor's required rate of return is 14 percent, the expected level of earnings at the end of this year (E,) is $14, the retention ratio is 30 percent, the return on equity (ROE) is 16 percent (that is, it can earn 16 percent on reinvested earnings), and similar shares of stock sell at multiples of 7.609 times earnings per share. Ruestions: Determine the expected growth rate for dividends. - Determine the price earnings ratio (PIE,). What is the stock price using the PIE ratio valuation method? .What is the stock price using the dividend discount model? .What would happen to the PE ratio (PIE,) and stock price if the company increased its retention rate to 70 percent (holding all else constant)? What would happen to the P/E ratio (PIE,) and stock price if the com vidends? What have you learned about the relationship between the retention rate and the PE ratios?

Common stock valuation) Assume the following: the investor's required rate of return is 14 percent, the expected level of earnings at the end of this year (E,) is $14, the retention ratio is 30 percent, the return on equity (ROE) is 16 percent (that is, it can earn 16 percent on reinvested earnings), and similar shares of stock sell at multiples of 7.609 times earnings per share. Ruestions: Determine the expected growth rate for dividends. - Determine the price earnings ratio (PIE,). What is the stock price using the PIE ratio valuation method? .What is the stock price using the dividend discount model? .What would happen to the PE ratio (PIE,) and stock price if the company increased its retention rate to 70 percent (holding all else constant)? What would happen to the P/E ratio (PIE,) and stock price if the com vidends? What have you learned about the relationship between the retention rate and the PE ratios?

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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