Question

A firm has earnings of $1.45 this year and a P/E ratio of 20. It is...

A firm has earnings of $1.45 this year and a P/E ratio of 20. It is currently expected to grow at 3.6% per year forever. What would its new P/E ratio be if it could increase this growth to 5.7% per year without a change in its cost of capital?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

PE Ratio = 20

Price / Earnings = 20

Price = 20 * Earnings

= 20 * 1.45

= 29

D0 = 1.45

Value of Stock =

29   =

29 * Rate of Return - 29 * 0.036 = 1.5022

29 * Rate of Return - 1.044 = 1.5022

Rate of Return = (1.5022 + 1.044) / 29

Rate of Return = 8.78%

Price at new Growth Rate =

=

= 1.53265 / 0.0308

= 49.76

NEW PE = Price / Earning

= 49.76 / 1.45

= 34.32

NOTE: The answer to your question has been given below/above. If there is any query regarding the answer, please ask in the comment section. If you find the answer helpful, do upvote. Help us help you.  

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Consider a growing firm that is expected to produce earnings of $10 million next year. The...
Consider a growing firm that is expected to produce earnings of $10 million next year. The firm’s earnings growth rates are 15% per annum. The firm’s cost of capital is 20%. Its tax rate is 0. 1. What is the market value of this firm? 2. What is the firm’s P/E ratio if it has no debt? 3. Now assume that the cost of capital for debt of $100 million is 8%, while the cost of capital for the remaining...
25.       Which of the following is true regarding the price/earnings ratio?             A)        A high P/E ratio is
25.       Which of the following is true regarding the price/earnings ratio?             A)        A high P/E ratio is often taken to mean the firm has poor prospects for future growth.             B)        A P/E ratio of 15 means investors are willing to pay $1 for each $15 of past earnings.             C)        Low P/E ratios can only result from a firm having very low earnings.             D)        If a firm has high earnings per share, then it will have a very high P/E ratio. E) NONE OF THE ABOVE...
Which of the following is true about the P/E ratio of a firm?​ a. ​If a...
Which of the following is true about the P/E ratio of a firm?​ a. ​If a firm's P/E ratio is 8, then, it would take 8 years for an investor to double his or her initial investment. b. ​If a company's P/E ratio is too high relative to that of similar firms, its earnings have not been fully captured in the existing stock value. c. ​The higher the P/E ratio, the less investors are willing to pay for each dollar...
A. Growth and Value A firm has projected earnings of $6 per share for next year...
A. Growth and Value A firm has projected earnings of $6 per share for next year and has a 30% dividend payout ratio. The firm's required return is 13%. The firm's ROE is 14%. What is the intrinsic value of the stock? $56.25 $54.33 $50.77 $49.65 B. Value of Growth Opportunities A firm has projected annual earnings per share of $4.00 and a dividend payout ratio of 60%. The firm's required return is 11% and dividends and earnings are expected...
The Vinson Corporation has earnings of $1,106,000 with 370,000 shares outstanding. Its P/E ratio is 12....
The Vinson Corporation has earnings of $1,106,000 with 370,000 shares outstanding. Its P/E ratio is 12. The firm is holding $410,000 of funds to invest or pay out in dividends. If the funds are retained, the aftertax return on investment will be 10 percent, and this will add to present earnings. The 10 percent is the normal return anticipated for the corporation, and the P/E ratio would remain unchanged. If the funds are paid out in the form of dividends,...
Laurel Enterprises expects earnings next year of ​$3.84 per share and has a 50 % retention​...
Laurel Enterprises expects earnings next year of ​$3.84 per share and has a 50 % retention​ rate, which it plans to keep constant. Its equity cost of capital is 11 %​, which is also its expected return on new investment. Its earnings are expected to grow forever at a rate of 5.5 % per year. If its next dividend is due in one​ year, what do you estimate the​ firm's current stock price to​ be?
Cisco currently has a market leverage ratio of 20%. However, it has decided to decrease its...
Cisco currently has a market leverage ratio of 20%. However, it has decided to decrease its leverage to a new target of 15%. Currently, Cisco's expected return on equity is 14% and the expected return on its assets is 12%. Which of the following is true of its expected return on assets following the change to a new target leverage? Group of answer choices It will remain 12%. It is impossible to know how the expected return on assets would...
Apple Inc. has expected earnings of $6 per share for next year. The company's return on...
Apple Inc. has expected earnings of $6 per share for next year. The company's return on equity ROE is 20% and its earnings retention ratio is 70%. If the company's market capitalization rate is 15%, what is the present value of its growth opportunities if the company's expected P/E ratio is 30?
Check the correct statement f a firm reinvests its earnings at an ROE equal to the...
Check the correct statement f a firm reinvests its earnings at an ROE equal to the market capitalization rate, then its earnings-price (E/P) ratio is equal to the market capitalization rate. The value of a share equals the present value of all future dividends per share. If a security is underpriced, then the expected holding period return is above the market capitalization rate. The value of a share equals the present value of earnings per share assuming the firm does...
Stephens Inc (SI) has earnings of $150,000 this year, expects earnings to grow by 4% annually...
Stephens Inc (SI) has earnings of $150,000 this year, expects earnings to grow by 4% annually and has a P0/E1 ratio of 30. If SI can increase growth to 6% annually how much would the P0/E1 ratio increase? What would be the new value of SI?
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT