Question

Answer is complete but not entirely correct. PE ratio 12.37 e. What would the price and P/E ratio be if the firm paid out all earnings as dividends? (Round your answers to 2 decimal places.) 3 Answer is complete but not entirely correct. Price PE ratio $5300 17 67 % < Prev 20 of 29 Next > DOLL

Answer 1

Rate of Return (ROE) = 20%

Payout Ratio = 0.7

Retention Ratio = 1-0.7 = 0.3

EPS (Earnings per share) = $3

Expected Rate of Return(r) = 12%

Dividend = Payout Ratio*EPS = 0.7*3 = $2.1

a. Sustainable Growth Rate(g) = ROE*Retention Ratio

Sustainable Growth Rate = 20%*0.3 = 6%

b. Stock Price = Dividend/(r-g)= 2.1/(12%-6%) = $35

c. P/E = Stock Price per share/EPS = 35/3 = 11.67

d. If Payout Ratio = 100%

Stock Price = EPS/ r = 3/0.12 =$25

P/E = 25/3 = 8.34