Stormy Weather has no attractive investment opportunities. Its return on equity
ID: 2719115 • Letter: S
Question
Stormy Weather has no attractive investment opportunities. Its return on equity equals the discount rate, which is 10%. Its expected earnings this year are $2 per share. Find the stock price, P/E ratio, and growth rate of dividends for plowback ratios of: (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Enter the growth rate as a percent rounded to 1 decimal place.) Plowback Ratios Stock Price P/E Ratio Growth Rate of Dividends a. Zero $ % b. .10 % c. .60 %
Explanation / Answer
stock price = EPS /discount rate
= 2 / .10
= $ 20 per share
PE ratio =MPS /EPS
= 20 /2
= 10
Growth rate = IRR *retention ratio
since there is no investment opportunity ,it is better to payoff all dividend ,so retentio ratio = 0
= 10 *0 =0%
Growth ratio = 0%