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Do Homework- Ira Randall- Google C Secure https://www.mathxl.com/Student/PlayerHomework.aspx?homeworkld MBA 579 (Summer 2018) Homework: Chapter 10 Homework Score: 0 of 5 pts P10-14 (similar to) 5 of 6 (0 complete)HW Score: : Question (Common stock valuation) Assume the following the investor\'s required rate of return is 15 percent, the expected level of earnings at the end of this year (E1) is S6. , the retention ratio is 55 percent, the return on equity (ROE) is 18 percent (that is, it can earn 18 percent on reinvested earnings), and : similar shares of stock sell at multiples of 8 823 times earnings per share Questions: a. Determine the expected growth rate for dividends b. Determine the price earnings ratio (PIE1). c. What is the stock price using the P/E ratio valuation method? a. What is the expected growth rate for dividends? % (Round to two decimal places ) 6

Solution

As per policy, only four parts of a question are allowed to answer at a time, so answering 5 parts:

P10-14)
a. The expected growth rate for dividends:
Share price expected = 6 * 8.823 = 52.94
expected growth rate = share price = D1 / R - g = 52.94 = 6 * 0.45 / 18 - g
(52.94/2.70)* (0.18 - g) = 1
19.61 (0.18 - g) = 1
19.61g =3.53 - 1
g = 2.53 / 19.61 = 12.90%
b. P/E ratio = 52.94 / 6 = 8.823
c. Stock price using P/E ratio valuation method =P / E = PE ratio = P / E
P / 6 = 8.823   => P=6 * 8.823 = 52.94
d) Price = 2.53 / 0.18 - 0.129 = 2.53 / 0.051 = $49.61 per share
e) when required return = 23%
Price = 2.70 / 0.23 - 0.129 = 26.73 per share