Given that a firm’s return on equity is 22 percent

Given that a firm’s return on equity is 22 percent

Question 8: (10 points). (Measuring growth) Given that a firm’s return on equity is 22 percent and management plans to retain 37 percent of earnings for investment purposes, what will be the firm’s growth rate? If the firm decides to increase its retention rate, what will happen to the value of its common stock? (Round to two decimal places.)

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Question 9: (10 points). (Relative valuation of common stock) Using the P/E ratio approach to valuation, calculate the value of a share of stock under the following conditions:

 

·         the investor’s required rate of return is 13 percent,

·         the expected level of earnings at the end of this year (E1) is $8,

·         the firm follows a policy of retaining 40 percent of its earnings,

·         the return on equity (ROE) is 15 percent, and

·         similar shares of stock sell at multiples of 8.571 times earnings per share.

 

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