Just when i think I may be starting to get it together, I take a step back, Came across this on Schweser exam 3 afternoon. A stock has the following data associated with it required rate of return 0f 14% a return on equity of 15% an earnings retention rate of 40% the stocks price to earnings ratio should be? a 4.4 b 5.0 c 6.7 d 7.5 Hit a blank with this one, ant assistance greatly appreciated…cheers!
G= roe x rr = .06 req return = .14 div payout = .60 .60/(.14-.06) = 7.5
d 7.5 P/E = div payout/k-g g= roe(retention rate) so .15*.4 = .06 P/e = .6/.14-.06 7.5
Doh…! Tks guys, seems easy and slightly obvious now!