Secure I httpswu MBA 579 Summer 2018 Homework Chapter 10 Sav

Secure I httpswu MBA 579 (Summer 2018) Homework: Chapter 10 Sav Homework Score: 0 of 4 pts P10-12 (similar to) 4 of 6 (0 complete) HW Score: 0%, 0 Question Help 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 14 percent, the expected level of earnings at the end of this year (E1) is $7 the firm follows a policy of retaining 50 percent of its earnings, , the return on equity (ROE) is 14 percent, and : similar shares of stock sell at multiples of 7. 143 times earnings per share Now show that you get the same answer using the discounted dividend model a. The stock price using the PIE ratio valuation method is s(Round to the nearest cent.) Enter your answer in the answer box and then click Che to sea

Solution

a) P/E ratio valuation

Stock price = P/E ratio x Expected earnings per share = $7.143 x $7 = $50.00

b) Dividend Discount model

Expected dividend (D1) = Expected earnings x (1 - retention ratio) = $7 x (1 - 0.50) = $3.50

Growth rate (g) = ROE x retention ratio = 14% x 0.50 = 7% or 0.07

Required return (Ke) = 14% or 0.14

Stock price (P0) = D1 / (Ke - g) = $3.50 / (0.14 - 0.07) = $50.00