A stock has a beta of 1.1 and the risk-free rate is 5.5%. Its dividend growth rate is 4.1% and the dividend payout ratio is 38%. If the market risk premium is 7.3%, the P/E ratio of the stock equals ________.
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A. B. C. D.D
The required rate of return on the stock can be found using CAPM, which gives Rstock = k = Rf + beta*(Rm - Rf) = 5.5% + 1.1*7.3% = 13.53%. Therefore, P0/E1 = dividend payout/(k - g) = 0.38/(0.1353 - 0.041) = 4.03.