Question

Question 9: (10 points). (Relative valuation of common stock) 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 13 percent, the expected level of earnings at the end of this year (E1) is $8, the firm follows a policy of retaining 40 percent of its earnings, the return on equity (ROE) is 15 percent, and similar shares of stock sell at multiples of 8.571 times earnings per share. Now show that you get th cent.) e same answer using the discounted dividend model. (Round to the nearest a. The stock price using the P/E ratio valuation method is: b. The stock price using the dividend discount model is:

Answer 1

to calculate stock price using P/E ratio :

stock price = multiple*expected level of earnings

to calculate stock price using dividend discount model

stock price = expected dividend/(required return- growth rate for dividend)

1 required return 2 expected level of earnings 3 retention ratio 4 dividend payout ratio 5 ROE 6 multiple 0.13 0.4 0.6 0.15 8.571 9 stock price using P/E ratio 10 b) 11 growth rate for dividends 12 expected dividend 68.57 0.06 4.8 stock price using the 13 dividend discount model 68.57 16