The market capitalization rate for Admiral Motors Company is 11%

Finance Apr 19, 2021

The market capitalization rate for Admiral Motors Company is 11%. Its expected ROE is 12% and its expected EPS is $6. The firm's plowback ratio is 50%.
a. Calculate the growth rate. (Input your answer as a nearest whole percent.)
Growth rate r
1%
b. What will be its P/E ratio? (Do not round intermediate calculations.)
PIE ratio
r

Expert Solution

a) Computation of Growth Rate:

Growth rate=ROE*Plowback ratio

= 0.12*0.50

= 0.06 or 6%

b) Computation of P/E Ratio:

Dividend payout ratio=1-Plowback ratio

= 1-0.5

= 50%

Hence expected dividend=(50%*EPS)

= 0.5*$6

= $3

Current price=D1/(Market capitalization-Growth rate)

=3/(0.11-0.06)

=$60

P/E Ratio = Market Price/EPS

=$60/$6

=10

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