The market equilibrium rate on the stock of Williams Brothers is 8.5%. Its expected return on equity is 12.5% and its expected earnings per share is $4.50. If the firm’s retention ratio is 37.5%, its price to earnings ratio will be closest to: A 15.9 B 16.4 C 16.8 D 17.2
B equilibrium is the return required, g=12.5*.375=4.6875%, P/E=(1-.375)/(.085-.046875)=16.39
Tonight Bud Light salutes you Map1… for those of us who cannot pull off a question like this from memory…This Bud’s for you!
Unfortunatelly for me, I’m better at number crunching and algebra than concepts. I just cannot remember that many concepts.
B it is PE = DPO/ (r- g) here the steps are find DPO and find G G = ROE * rr and DPO = 1 -rr another way to find DPO is DPS/EPS but we don’t have the dividend given to us. .625/3.9% = ~ 16x