the investor's required rate of return is 15 percent, the expected level of earnings at the end of this year (E,) is $7, the retention ratio is 40 percent, the return on equity (ROE) is 19 percent (that is, it can earn 19 percent on reinvested earnings), and similar shares of stock sell at multiples of 8.109 times earnings per share. uestions: Determine the expected growth rate for dividends. Determine the price earnings ratio (PIE,). What is the stock price using the P/E ratio valuation method? What is the stock price using the dividend discount model? ...... .6 % (Round to two decimal places.) What is the price earnings ratio (PIE,)? 109 (Round to three decimal places.) What is the stock price using the P/E ratio valuation method? 56.76 (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
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part e 

**Common Stock Valuation**

**Assumptions:**
- The investor's required rate of return is 15 percent.
- The expected level of earnings at the end of this year (\(E_1\)) is $7.
- The retention ratio is 40 percent.
- The return on equity (ROE) is 19 percent (that is, it can earn 19 percent on reinvested earnings).
- Similar shares of stock sell at multiples of 8.109 times earnings per share.

**Questions:**

a. Determine the expected growth rate for dividends.

   **Answer:** 7.6% (Round to two decimal places.)

b. Determine the price earnings ratio (\(P/E_1\)).

   **Answer:** 8.109 (Round to three decimal places.)

c. What is the stock price using the P/E ratio valuation method?

   **Answer:** $56.76 (Round to the nearest cent.)

d. What is the stock price using the dividend discount model?

   **Answer:** $56.76 (Round to the nearest cent.)

e. Using the dividend discount model, what would be the stock price if the firm could earn 24% on reinvested earnings (ROE)?

   **Answer:** $____ (Round to the nearest cent.)
Transcribed Image Text:**Common Stock Valuation** **Assumptions:** - The investor's required rate of return is 15 percent. - The expected level of earnings at the end of this year (\(E_1\)) is $7. - The retention ratio is 40 percent. - The return on equity (ROE) is 19 percent (that is, it can earn 19 percent on reinvested earnings). - Similar shares of stock sell at multiples of 8.109 times earnings per share. **Questions:** a. Determine the expected growth rate for dividends. **Answer:** 7.6% (Round to two decimal places.) b. Determine the price earnings ratio (\(P/E_1\)). **Answer:** 8.109 (Round to three decimal places.) c. What is the stock price using the P/E ratio valuation method? **Answer:** $56.76 (Round to the nearest cent.) d. What is the stock price using the dividend discount model? **Answer:** $56.76 (Round to the nearest cent.) e. Using the dividend discount model, what would be the stock price if the firm could earn 24% on reinvested earnings (ROE)? **Answer:** $____ (Round to the nearest cent.)
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