a company currently has $3.50 earnings per share of which $1.05 is paid in annua

Question

a company currently has $3.50 earnings per share of which $1.05 is paid in annual dividends per share. if the growth rate for the firm is 4% per year and the required return is 9%, what is the theoretical P/E ratio? a company currently has $3.50 earnings per share of which $1.05 is paid in annual dividends per share. if the growth rate for the firm is 4% per year and the required return is 9%, what is the theoretical P/E ratio? a company currently has $3.50 earnings per share of which $1.05 is paid in annual dividends per share. if the growth rate for the firm is 4% per year and the required return is 9%, what is the theoretical P/E ratio?

Explanation / Answer

We know That

P0 = D1 / (ke – G)

Where P0= Current Market Price, D1 = Next Expected Dividend

Ke= Required rate of return ( 9 %)

G = Growth rate in earning and dividend ( 4 %)

D1 = D0 ( 1+G)

D1 = 1.05 ( 1.04)

D1= 1.09

Now P0 = 1.09/ (0.09-0.04)

P0= 21.84

P/E Ratio= Current Price of share / EPS

P/E ratio= 21.84/ 3.50

P/E Ratio= 6.24 times

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