If a stock has an expected dividend payout ratio of 50%, a required rate of return of 13% and an expected dividend growth rate of 10%, what is the P/E ratio?
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A. B. C. D.C
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 = .50/(.13-.10) = 16.7