You have been reading about the Madison Computer Company (MCC), which currently retains 90 percent of its earnings ($5 a share this year). It earns an ROE of almost 30 percent.
a. Assuming a required rate of return of 14 percent, how much would you pay for MCC on the basis of the earnings multiplier model? Discuss your answer.
b. What would you pay for Madison Computer if its retention rate was 60 percent and its ROE was 19 percent? Show your work.