Castle-in-Sand generates a rate of return of 20% on its investments and maintains a plowback ratio of 0.30. Its earnings this year will be $4 per share. Investors expect a 12% rate of return on the stock. Required: (a.) (Ь.) (c.) Find the price and P/E ratio of the firm. What happens to the P/E ratio if the plowback ratio is reduced to 0.20? Why? Show that if plowback equals zero, the earnings-price ratio, E/P, falls to the expected rate of return on the stock.
Castle-in-Sand generates a rate of return of 20% on its investments and maintains a plowback ratio of 0.30. Its earnings this year will be $4 per share. Investors expect a 12% rate of return on the stock. Required: (a.) (Ь.) (c.) Find the price and P/E ratio of the firm. What happens to the P/E ratio if the plowback ratio is reduced to 0.20? Why? Show that if plowback equals zero, the earnings-price ratio, E/P, falls to the expected rate of return on the stock.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Castle-in-Sand generates a rate of return of 20% on its investments and maintains a plowback
ratio of 0.30. Its earnings this year will be $4 per share. Investors expect a 12% rate of return on
the stock.
Required:
(a.)
(b.)
(c.)
Find the price and P/E ratio of the firm.
What happens to the P/E ratio if the plowback ratio is reduced to 0.20? Why?
Show that if plowback equals zero, the earnings-price ratio, E/P, falls to the expected rate
of return on the stock.
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