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Homework answers / question archive / (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 (Ei ) is $9, • the retention ratio is 40 percent, • the return on equity (ROE) is 17 percent (that is, it can earn 17 percent on reinvested earnings), and • similar shares of stock sell at multiples of 7

(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 (Ei ) is $9, • the retention ratio is 40 percent, • the return on equity (ROE) is 17 percent (that is, it can earn 17 percent on reinvested earnings), and • similar shares of stock sell at multiples of 7

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(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 (Ei ) is $9, • the retention ratio is 40 percent, • the return on equity (ROE) is 17 percent (that is, it can earn 17 percent on reinvested earnings), and • similar shares of stock sell at multiples of 7.317 times earnings per share. 
Questions: 
a. Determine the expected growth rate for dividends. b. Determine the price earnings ratio (P/E1 ). c. What is the stock price using the P/E ratio valuation method? d. What is the stock price using the dividend discount model? a. What is the expected growth rate for dividends? 
% (Round to two decimal places.) b. What is the price earnings ratio (P/E1 )? (Round to three decimal places.) c. What is the stock price using the P/E ratio valuation method? $ (Round to the nearest cent.) 
d. 

e. 

What is the stock price using the dividend discount model? (Round to the nearest cent.) Using the dividend discount model, what would be the stock price if the firm could earn 22% on reinvested earnings (ROE)? (Round to the nearest cent.) 
What would be the P/E ratio (P/Ei ) if the firm could earn 22% on reinvested earnings (ROE)? 
(Round to three decimal places.) 
 

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