The market requires a return of 9% from XYZ, Inc. The firm plowback 50% of its earnings, and its return on equity and ea...
The market requires a return of 9% from XYZ, Inc. The firm plowback 50% of its earnings, and its return on equity and earnings per share are expected to be 14% and $7, respectively.
a. What will be XYZ's growth rate? (Input your answer as a nearest whole percent.)
b. Calculate XYZ's P/E ratio? (Do not
round intermediate calculations.)
Homework Answers
a.
Growth Rate = Plowback ratio * Return on Equity
= 0.50 * 0.14
Growth Rate = 0.07 or 7%
b.
Plowback Ratio = 1 - (DPS/EPS)
0.50 = 1 - (DPS/7)
DPS = (1 - 0.50) * 7
DPS = 3.5
Market Price = D0(1+g) / (k - g)
= 3.5(1+0.07) / (0.09 - 0.07)
Market Price = $187.25
P/E Ratio = Price per share / Earning per share
= 187.25 / 7
P/E Ratio = 26.75
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