mework 4 Help Save & Exlt Submlt Check my work Castles in the Sand generates a r

Question

mework 4 Help Save & Exlt Submlt Check my work Castles in the Sand generates a rate of return or 15% on its nvestments and maintains a plowback rato, of 020 its earnings this year will be $6 per share. Investors expect a rate of return of 10% on the stock. d intermediate calculations. Round your answers to 2 decimal places.) a. Find the price and P/E ratio of the firm. (Do not round ratio is reduced to 010 (Do not round intermediate calculations b. Find the price and P/E ratio of the your answers to 2 decimal places.)

Explanation / Answer

a.

Growth rate ( g ) = ROE x Plowback Ratio = 0.15 x 0.20 = 0.03 or 3 %

Expected Return ( r ) = 10 %

As per Gordon's Growth Model,

Price = EPS ( 1 - Plowback Ratio) / ( r - g) or

$ 6 ( 1 - 0.20) / ( 0.10 - 0.03) = $ 68.57

P/E Ratio = Price / EPS = $ 68.57 / $ 6 = 11.43

b.

Price $ 68.57 P/ E Ratio 11.43

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