Question

You forecast a company to have a ROE of 10%, a dividend payout ratio of 35%....

You forecast a company to have a ROE of 10%, a dividend payout ratio of 35%. Currently the company has a price of $30 and $8 earnings per share.   What is the company's PEG ratio based on market price?
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Answer #1

Given,

ROE = 10% or 0.10

Dividend payout ratio = 35% or 0.35

Price = $30

Earnings per share = $8

Solution :-

Earnings growth rate = ROE x (1 - dividend payout ratio)

= 0.10 x (1 - 0.35)

= 0.10 x 0.65 = 0.065 or 6.50%

P/E ratio = Price earnings per share

= $30 $8 = 3.75

PEG ratio = P/E ratio Earnings growth rate

= 3.75 6.50% = 0.5769

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