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Your firm is expected to earn $1.51/share next year and has a cost of capital of...

Your firm is expected to earn $1.51/share next year and has a cost of capital of 14.2%. Assume these earnings resemble a perpetuity with growth rate 4.1%. What is its price/earnings ratio?

Carry out calculations to at least 4 decimal places. Enter percentages as whole numbers. Example: 3.03% should be entered as 3.03. Do not include commas or dollar signs in numerical answers.

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Answer #1

Current price=D1/(Cost of capital-Growth rate)

=1.51/(0.142-0.041)

=$14.9505

Hence price/earnings ratio=Market price/EPS

=$14.9505/$1.51

=9.9010(Approx).

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