Stormy Weather has no attractive investment opportunities. Its return on equity

Question

Stormy Weather has no attractive investment opportunities. Its return on equity equals the discount rate, which is 5%. Its expected earnings this year are $3 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. .40                      %   c. .80                      %

Explanation / Answer

a. 0 b. 0.4 c. 0.8 Return on equity 5.00% Discount rate 5.00% Expected earnings per share $3.00 Solution: a. Stock price = $60.00 3/0.05 P/E ratio = 20 60/3 Growth rate of dividends = 0.00% b. Stock price = $40.00 3/0.05 P/E ratio = 20 60/3 Growth rate of dividends = 2.00% 0.4*0.05 c. Stock price = $40.00 3/0.05 P/E ratio = 20 60/3 Growth rate of dividends = 4.00% 0.8*0.05

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