Question

The market capitalization rate for Admiral Motors Company is 8%. Its expected ROE is 10% and its expected EPS is $5. The firm's plowback ratio is 60%. a. Calculate the growth rate. (Input your answer as a nearest whole percent.) b. What will be its P/E ratio? (Do not round intermediate calculations.)

Answer 1

Answer:

(A) 6%

(B) 20

Explanation:

The market capitalization rate for Admiral motors is 8%

= 8/100

= 0.08

The expected ROE is 10%

= 10/100

= 0.1

The expected EPS is $5

The Plowback ratio is 60%

= 60/100

= 0.6

(A) The growth rate can be calculated as follows

= Plowback ratio × ROE

= 0.6 × 0.1

= 0.06×100

= 6%

Hence the growth rate is 6%

(B) The P/E ratio can be calculated as follows

= 1-0.6/0.08-0.06

= 0.4/0.02

= 20

Hence the P/E ratio is 20