Consider a company that pays out all its earnings (i.e., the payout ratio = 1 or plowback/retention ratio=0). The required return for the firm is 13%. Compute the intrinsic P/E if its ROE is 15%. Compute the intrinsic P/E if its ROE is 20%. Discuss why your answers to parts (a) and (b) differ or do not differ from one another. Suppose that the company’s ROE is 13%. Compute its intrinsic P/E value. Would the answer to part (d) change if the company retained half of its earnings instead of paying all of them out? Discuss why or why not.
Consider a company that pays out all its earnings (i.e., the payout ratio = 1 or plowback/retention ratio=0). The required return for the firm is 13%. Compute the intrinsic P/E if its ROE is 15%. Compute the intrinsic P/E if its ROE is 20%. Discuss why your answers to parts (a) and (b) differ or do not differ from one another. Suppose that the company’s ROE is 13%. Compute its intrinsic P/E value. Would the answer to part (d) change if the company retained half of its earnings instead of paying all of them out? Discuss why or why not.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter16: Capital Structure Decisions
Section: Chapter Questions
Problem 2MC
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Consider a company that pays out all its earnings (i.e., the payout ratio = 1 or plowback/retention ratio=0). The required return for the firm is 13%.
- Compute the intrinsic P/E if its
ROE is 15%. - Compute the intrinsic P/E if its ROE is 20%.
- Discuss why your answers to parts (a) and (b) differ or do not differ from one another.
- Suppose that the company’s ROE is 13%. Compute its intrinsic P/E value.
- Would the answer to part (d) change if the company retained half of its earnings instead of paying all of them out? Discuss why or why not.
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