Common Stock​ Valuation Assignment | Homework For You

​(Common stock​ valuation)  Assume the​ following: bullet  the​ investor’s required rate of return is 14 ​percent, bullet  the expected level of earnings at the end of this year ​(Upper E 1​) is ​$8​, bullet  the retention ratio is 50 ​percent, bullet  the return on equity ​(ROE​) is 16 percent​ (that is, it can earn 16 percent on reinvested​ earnings), and bullet  similar shares of stock sell at multiples of 8.334 times earnings per share. ​Questions:

a.  Determine the expected growth rate for dividends.

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b.  Determine the price earnings ratio ​(P​/Upper E 1​).

c.  What is the stock price using the​ P/E ratio valuation​ method? d.  What is the stock price using the dividend discount​ model?

e.  What would happen to the ​P/E ratio ​(P​/Upper E 1​) and stock price if the firm could earn 21 percent on reinvested earnings ​(ROE​)?

f.  What does this tell you about the relationship between the rate the firm can earn on reinvested earnings and ​P/E​ ratios?Get Finance homework help today