html mework 4 Help Save & Exlt Submit Check my work Castles in the Sand generate
ID: 2806149 • Letter: H
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html mework 4 Help Save & Exlt Submit Check my work Castles in the Sand generates a rate of return of 12% on its investments and maintains a plow back ratio of 020. Its earnings this year will be $5 per share. Investors expect a rate of return of 10% on the stock. a. Find the price and P/E ratio of the firm. (Do not round intermediate calculations. Round your answers to 2 decimal places.) PIE rato b. Find the price and P/E ratio of the firm if the plowback ratio is reduced to 0.10. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Prex 19 of 25 Next >Explanation / Answer
Answer a Dividend per share = Earnings per share * [1-Plowback ratio] Dividend per share = $5 * [1-0.20] = $4 Market price per share = Dividend per share / Rate of return = $4/12% = $33.33 P/E ratio i.e. Price Earning ratio = Market price per share / Earnings per share = $33.33 / $5 = 6.67 Answer b Dividend per share = Earnings per share * [1-Plowback ratio] Dividend per share = $5 * [1-0.10] = $4.5 Market price per share = Dividend per share / Rate of return = $4.50/12% = $37.50 P/E ratio i.e. Price Earning ratio = Market price per share / Earnings per share = $37.50 / $5 = 7.50
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