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Related to Checkpoint 10.2)(Relative valuation of common stock)Using the P/E ratio approach to valuation

Question

(Related to Checkpoint 10.2)(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:bullet•the investor’s required rate of return is 1313percent,bullet•the expected level of earnings at the end of this year (Upper E 1E1)is $77,bullet•the firm follows a policy of retaining 3030percent of its earnings,bullet•the return on equity (ROE)is 1414percent, andbullet•similar shares of stock sell at multiples of 7.9547.954times earnings per share.Now show that you get the same answer using the discounted dividend model.

 
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