(Common stock valuation) Assume the following: the investor's required rate of return is 18 percent, the expected level of earnings at the end of this year (E₁) is $9, the retention ratio is 50 percent, the return on equity (ROE) is 16 percent (that is, it can earn 16 percent on reinvested earnings), and similar shares of stock sell at multiples of 5.000 times earnings per share. Questions: a. Determine the expected growth rate for dividends. b. Determine the price earnings ratio (P/E₁). c. What is the stock price using the P/E ratio valuation method? d. What is the stock price using the dividend discount model? a. What is the expected growth rate for dividends? % (Round to two decimal places.)

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
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(Common stock valuation) Assume the following:
the investor's required rate of return is 18 percent,
the expected level of earnings at the end of this year (E₁) is $9,
the retention ratio is 50 percent,
the return on equity (ROE) is 16 percent (that is, it can earn 16 percent on reinvested earnings), and
similar shares of stock sell at multiples of 5.000 times earnings per share.
Questions:
a. Determine the expected growth rate for dividends.
b. Determine the price earnings ratio (P/E₁).
c. What is the stock price using the P/E ratio valuation method?
d. What is the stock price using the dividend discount model?
a. What is the expected growth rate for dividends?
% (Round to two decimal places.)
Transcribed Image Text:(Common stock valuation) Assume the following: the investor's required rate of return is 18 percent, the expected level of earnings at the end of this year (E₁) is $9, the retention ratio is 50 percent, the return on equity (ROE) is 16 percent (that is, it can earn 16 percent on reinvested earnings), and similar shares of stock sell at multiples of 5.000 times earnings per share. Questions: a. Determine the expected growth rate for dividends. b. Determine the price earnings ratio (P/E₁). c. What is the stock price using the P/E ratio valuation method? d. What is the stock price using the dividend discount model? a. What is the expected growth rate for dividends? % (Round to two decimal places.)
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