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(Solved): (Common stock valuation) Assume the following: - the investor's required rate of return is 12 perce ...





(Common stock valuation) Assume the following:
- the investors required rate of return is 12 percent,
- the expected level o
(Common stock valuation) Assume the following: - the investor's required rate of return is 12 percent, - the expected level of earnings at the end of this year \( \left(E_{1}\right) \) is \( \$ 10 \), - the retention ratio is 50 percent, - the return on equity (ROE) is 13 percent (that is, it can earn 13 percent on reinvested earnings), and - similar shares of stock sell at multiples of \( 9.091 \) times earnings per share. Questions: a. Determine the expected growth rate for dividends. b. Determine the price eamings ratio \( \left(P / E_{1}\right) \). c. What is the stock price using the P/E ratio valuation method? d. What is the stock price using the dividend discount model? a. What is the expected growth rate for dividends? \% (Round to two decimal places.)


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(i) g = b x r g = growth rate in dividends b = retention ratio = 45% or 0.45 r = return on equity = 18% or 0.18 = 0.45 x 0.18 = 0.0810 = 8.10%
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