A. Price-Earnings Ratios A firm has positive ROE but zero growth in earnings. Th
ID: 2825074 • Letter: A
Question
A.
Price-Earnings Ratios A firm has positive ROE but zero growth in earnings. The stock is priced at $38.40 and has earnings of $3.60 per share. What is the firm's required return and optimal retention ratio?
9.38% ; 0
10.67%; 0
9.38%; 1
10.67%; 1
B.
P/E and Growth Daisy Pixie Stix pays out 30% of its earnings as dividends. The firm has been earnings $0.16 cents per dollar of equity invested in the firm and investors require a 12.75% return. The last annual earnings were $2.00 per share. What is the P/E ratio of the stock?
51.22
28.02
38.38
19.35
Price-Earnings Ratios A firm has positive ROE but zero growth in earnings. The stock is priced at $38.40 and has earnings of $3.60 per share. What is the firm's required return and optimal retention ratio?
Explanation / Answer
A) Required return = 3.60+38.40 = 9.38% Growth rate = 0 = R*retention ratio Hence, retention ratio = 0 Answer: 9.38%; 0 B) Growth rate = 70%*16.00% = 11.20% Price = D/(r-g) = 2.00*30%/(0.1275-0.1120) = $ 38.71 P/E = Price/EPS = 38.71/2 = 19.36 Answer: 19.35