An analyst gathered the following data for the Parker Corp. for the year ended December 31, 2005: EPS2005 = 1.75 Dividends2005 = 1.40 Beta Parker = 1.17 Long-term bond rate = 6.75% Rate of return S&P500 = 12.00% The firm is expected to continue their dividend policy in future. If the long-term growth rate in earnings and dividends is expected to be 6%, the appropriate P/E ratio for Parker Corp. will be: A) 21.54. B) 11.61. C) 12.31.

B

But while taking dividend into accout, should nt it be multipled by 1.06 to make it D1 rather tan D0

yes it should be multiplied, but you are calculating P/E ratio, and it is given in the question that dividends and earnings grow at the same rate. earnings will also grow by 6% to 1.75(1.06)

B

LT bond rate as RFR?

acer Wrote: ------------------------------------------------------- > But while taking dividend into accout, should nt > it be multipled by 1.06 to make it D1 rather tan > D0 Got you, thanks…was planning to cram it for some reason

can also calc Div p/out as: 1.4/1.75 = 80% and no need for D1 or E1 since same div policy continues.

B

C Gauri and others,plz correct me if my understanding is wrong: Cost of capital=rate of return on Equity=Kc Kc=6.76+1.17(12-6.75) =12.9025 P0=1.40(1.06)/(.0129025-.06) =21.4745 This would be the price in 2005 rt (dividend discounted to base year)?? Therefore shouldn’t we take EPS as EPS2005 instead of projeting it to 06 ,ie 1.75 (1.06) and hence P0/E0=21.4745/1.75=12.3 approx

In DDM you should use forward looking earnings not the trailing earnings

thanks for the clarification gauri

I can’t seem to get it CAPM gives you e® of 12.9% 1.06(1.4)/(12.9%-6.75%) would be the equation and the P/E would be 24.13. I know I’m doing something wrong and always mess these up.

p/e = div payout/k-g div payout = 80% since 1.40/1.75=.80 AND div policy stays the same so don’t need D1 or E1 in this case k=12.89 g=6 .80/.1289-.06 = 11.61% that’s how I got B…

not %…