(Relative valuation of common stock)
Using the P/E ratio approach to valuation, calculate the value of a share of stock under the following conditions:
- the investor's required rate of return is 14%,
- the expected level of earnings at the end of this year E1 is $7,
- the firm follows a policy of retaining 20% of its earnings,
- the return on equity (ROE) is 16% and
- similar shares of stock sell at multiples of 7.407 times earnings per share.
Now show that you get the same answer using the discounted dividend model.
a. The stock price using the ?P/E ratio valuation method is ?$______.(Round to the nearest cent.)
b. The stock price using the dividend discount model is ?$______.(Round to the nearest cent.)