Investors expect return of on the stock

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Reference no: EM132009622

A) XXX Corp. has a ROE equal to 10% and it consistently pays out 30% of earnings as dividends. Investors expect a return of 10% on the stock. The implied P/E ratio for XXX is (closest answer):

a) 3.6

b) 4.7

c) 7.0

d) 10.0

e) 12.5

B) Now suppose two stocks: Stock X and stock Y are expected to pay $ 2/share in dividend at the end of the year. Stock X’s dividend is supposed to grow at 3% per year, while stock Y’s dividend is supposed to grow at 2% per year. Both stock’s have similar risk and have a market capitalization rate of 12%. Stock X’s price should be:

a) Greater than stock Y’s price

b) Smaller than stock Y’s price

c) Equal to stock Y’s price

d) Not enough information

Reference no: EM132009622

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