(Related to Checkpoint 10.2) (Relative valuation of common stock) Using the P/E ratio approach to valuation, calculate the value of a share of stock under the following conditions: the investor's required rate of return is 12 percent, the expected level of earnings at the end of this year (E₁) is $5. the firm follows a policy of retaining 40 percent of its earnings, • the return on equity (ROE) is 13 percent, and • similar shares of stock sell at multiples of 8.824 times earnings per share. Now show that you get the same answer using the discounted dividend model. a. The stock price using the P/E ratio valuation method is $ (Round to the nearest cent.)
(Related to Checkpoint 10.2) (Relative valuation of common stock) Using the P/E ratio approach to valuation, calculate the value of a share of stock under the following conditions: the investor's required rate of return is 12 percent, the expected level of earnings at the end of this year (E₁) is $5. the firm follows a policy of retaining 40 percent of its earnings, • the return on equity (ROE) is 13 percent, and • similar shares of stock sell at multiples of 8.824 times earnings per share. Now show that you get the same answer using the discounted dividend model. a. The stock price using the P/E ratio valuation method is $ (Round to the nearest cent.)
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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(Related to Checkpoint 10.2) (Relative valuation of common stock) Using the P/E ratio approach to valuation.
calculate the value of a share of stock under the following conditions:
• the investor's required rate of return is 12 percent,
• the expected level of earnings at the end of this year (E₁) is $5,
the firm follows a policy of retaining 40 percent of its earnings,
the return on equity (ROE) is 13 percent, and
similar shares of stock sell at multiples of 8.824 times earnings per share.
Now show that you get the same answer using the discounted dividend model.
a. The stock price using the P/E ratio valuation method is $
(Round to the nearest cent.)
(0/10)
Expert Solution
Step 1: Define P/E ratio
The full name of the P/E ratio is the Price earning ratio, This ratio is important for the company valuation because of that the investor can determine whether the company is overpriced or underpriced in the market.
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