Expected Dividend Payout Ratio, Required Rate of Return, and Expected Growth Rate for Dividends: P/E Ratio Calculation

P/E Ratio Calculation

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Question

If a stock has an expected dividend payout ratio of 30 percent, a required rate of return of 10 percent and an expected growth rate for dividends of 5 percent, what is the P/E ratio?

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A. B. C. D.

B

The price/earnings ratio can be computed by dividing the expected dividend payout ratio (dividends divided by earnings) by the required rate of return (k) minus the expected growth rate of dividends (g).

In this case, P/E = .3/(.1-.05) = 6.5

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