Relative valuation of common stock

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Reference no: EM131020592

(Relative valuation of common stock). Using P/E ratio approach to valuation calculate the value of a share of stock under the following conditions. .

The investor require rate of return is 14 percent,

the expected level of earnings at the end of this year( E1) is $ 6.

the firm follow a policy of retaining 40 percent of its earnings,

the return on equity ( ROE) is 13 percent and

similar shares of stock sell at multiple of 8.108 times earnings per share

Now show that you get same answer using the discounted dividends model .

a) The stock price using the P/E ratio valuation method is…… ( around to nearest cent)

b) The stock price using the dividends discount model is ……… ( around to nearest cent)

Reference no: EM131020592

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