Ace Incorporated has just paid a dividend of $4.00 per share.They have a retention ratio of 20 percent.They have a P/E ratio of 14.What should be the current price of the stock?
A) $56.00
B) $11.20
C) $70.00
D) $46.67
E) There is not enough information to answer this question.

Question

Quizplus · Accepted Answer

First, we need to calculate the earnings per share (EPS), which is the amount of earnings generated per share of outstanding stock. We can use the retention ratio to calculate this:

Retention ratio = 20%
Payout ratio = 1 - 0.20 = 0.80
Dividend per share = $4.00

EPS = Dividend per share / Payout ratio
EPS = $4.00 / 0.80
EPS = $5.00

Next, we can use the P/E ratio to calculate the stock price:

P/E ratio = Price per share / EPS
14 = Price per share / $5.00
Price per share = 14 * $5.00
Price per share = $70.00

Therefore, the current price of the stock should be $70.00 (Choice C).

Ace Incorporated Has Just Paid a Dividend of $4