You are analyzing a firm that has:
If you think next year's earnings will be $4 per share, what value would you place on this stock?
Click on the arrows to vote for the correct answer
A. B. C. D.C
Dividend payout = 1 - earnings retention rate = 1 - .4 = .6
=+ B(-) = .06 + 1.2(.11 - .06) = .12
g = (retention rate)(ROE) = (.4)(.12) = .048
P/E = (div payout rate)/(k - g) = .6/(.12 - .048) = 8.33
Price = (E)(P/E) = (4)(8.33) = 33.32