 # P/E ratio

An investor purchased stock in a company for \$20 at the end of a year for which the company reported EPS of \$4.00. Due to capital investment needs, the company retains 75% of earnings and intends to maintain this retention rate in the future. Return on equity(ROE) is constant at 33.3%. If the expected price of the stock in 1 year is \$25, the expected 1 - year holding period return on this stock is: A. 12.25% B. 24.00% C. 28.50% D. 31.25% Isn’t the next year dividend = current dividend(1+g) = \$5?

D. \$4 is the eps. Dividend will be 4 * (1 - .75) = 1 1 * 1.25 = 1.25 (25 + 1.25)/ 20 = 1.3125 -1 = 31.25%

I think its D g = .75*.333 = .2497 i.e. .25 eps next year = 4*1.25 = 5 dividend over the year = 1.25 return = (26.25-20)/20 = 31.25%

D is correct. Thank you.

Growth rate is 0.33 * 0.75 = 25% So next year’s dividend = 4*1.25*.25 = 1.25 HPR = (25 + 1.25 - 20) / 10 - 1 = 31.25% So D is the answer

g = RR*ROE g = 0.75*0.333 = 0.24975 DPR = 1 - RR DRP = 1 - 0.75 DRP = 0.25 Do = 4*(0.25) = 1 D1 = D0(1 + g) = 1*(1 + 0.24975) D1 = 1.24975 (25 - 20 + 1.24975)/(20) = 6.24975/20 = 0.3124875 = D ?? - Dinesh S