Question

The market capitalization rate on the stock of Aberdeen Wholesale Company is 12%. Its expected ROE is 14%, and its expected EPS is $3. If the firm's plowback ratio is 80%, its P/E ratio will be _________.

Answer 1

Answer:

100

Explanation:

The market capitalization rate is 12%

= 12\100

= 0.12

Its expected ROE is 14%

= 14/100

= 0.14

The expected EPS is $3

The Plow back ratio is 80%

= 80/100

= 0.8

The first step is to calculate the dividend payout ratio

= 1-0.8

= 0.2

The expected dividend can be calculated as follows

=0.8×3

= $2.4

The growth rate can be calculated as

follows

= 0.8×0.14

= 0.112×100

= 112%

The value can be calculated as follows

= 2.4/0.12-0.112

= 2.4/0.008

= 300%

Therefore, the P/E ratio can be calculated as follows

= 300/3

= 100