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Return to question Stormy Weather has no attractive investment opportunities. Its return on equity equals the discount rate,

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Answer #1

Stock Price = Expected Dividend/(Required Return - Growth Rate)

Growth Rate = Return on Equity*Retention Ratio

P/E Ratio = Price per Share/Earnings per share

b.Growth Rate = 20%*0.4 = 8%

Stock Price = 2*0.6/(20%-8%) = $10

P/E Ratio = 10/2 = 5

c.Growth rate = 20%*0.6 = 12%

Stock Price = 2*0.4/(20%-12%)

= $10

P/E Ratio = 10/2

= 5

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