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Using the P/E ratio approach to valuation, calculate the value of a share of stock under the following conditions:
- the investors required rate of return 13%
-the expected level of earning at the end of the year (E1) is $6
-the firm follows a policy of retaining 50% of it's earnings.
-the return on equity (ROE) is 16%, and
-similar shares of stock sell at multiples of 10.000 times earning per share.
Now show that you get the same answer using the discounted dividend model.
a. the stock price using the P/E ratio valuation method is $________ (round to the nearest cent.)
b. The stock price using the dividend discount model is $_________ (round to the nearest cent.)
Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 9%, and all stocks have independent firm-specific components with a standard deviation of 49%. What is the expected return–beta relationship in this economy?
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