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1. Determine the price rangs ratio (PE) c. What is the stock price using the PE ratio valuation method d. What is the stock p
(Common stock valuation) Assume the following: • the investors required rate of return is 14.5 percent, • the expected level
i need e & f
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Answer #1

Expected growth rate = ROE*Retention ratio

= 15%*45%

= 6.75%

b.P/E Ratio = 7.096

c.Price = 14*7.096 = $99.344

d.Price = Expected Dividend/(Required return – Growth rate)

= 14*55%/(14.5%-6.75%)

= $99.3548 per share

e.Value of Stock at 75% Retention ratio = 14*25%/(14.5% - 15*75%)

= $107.69

Hence, P/E Ratio = 107.69/14

= 7.6923

At 0% Retention, Price = 14/(14.5%-0)

= 96.5517

P/E Ratio = 6.8966

f.Hence retention ratio. Higher will be the P/E Ratio

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