Suppose a firm has just reported an EPS of $2.50 and expects to maintain a dividend payout ratio of 40%.What is the firm's price-earnings ratio if its return on equity is 12% and the required return is 11.5%?

Question

Quizplus · Accepted Answer

The correct answer is B because the price-earnings ratio is calculated as the required return divided by the return on equity, which is 11.5% / 12% = 0.9583. This is then multiplied by the earnings per share of $2.50 to get a price-earnings ratio of $2.3958, or approximately $9.30.

Suppose a Firm Has Just Reported an EPS of $2