Given that the expected dividend payout ratio on a common stock is 0.55, the required rate of return is 17%, the dividend growth rate is 12%, and next year's earnings are $2.52, using the earnings multiplier model, what is the estimated value of the stock?
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A. B. C. D. E.E
The earnings multiplier model postulates that P/E = (D1/E)/(k -g), where P/E is the price to earnings ratio, D1 is next year's expected dividends, E is next year's earnings, k is the required rate of return, and g is the growth rate in dividends. D1/E is also known as the dividend payout ratio. In this question, the P/E is 0.55 /
(0.17 - 0.12) = 11. We can multiply P/E by next year's earnings to arrive at our expected current stock value ((P/E) x E = P). In this question, the estimated value is
11 x 2.52 = $27.72.