Please show all work. Silicon Valley Electronics (SVE) is expected to pay out 40

Question

Please show all work.

Silicon Valley Electronics (SVE) is expected to pay out 40% of its earnings and to earn an average return of 15% per year forever on its reinvested earnings. Stocks with similar characteristics are priced to return 12% to investors. a. By what percentage can SVE's earnings per share be expected to grow each year? b. What is the appropriate P/E ratio for the stock? Answer = 13.33 c. What portion of SVE's total yield is likely to come from capital gains? d. What portion will come from dividend yield?

Explanation / Answer

Dividend Payout = 40% Average rate of Return = 15% Stock with similar characterstics grows = 12% 1) SVE earning per share growth rate = (100-40)% X 15%= 9% 2) Appropriation P/E ratio for stock = (40%)/(15%-12%)= 13.33

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