Over the past few years, Swanson Company has retained, on the average, 70 percent of its earnings in the business.The future retention rate is expected to remain at 70 percent of earnings, and long-run earnings growth is expected to be 10 percent.If the risk-free rate, rRF, is 8 percent, the expected return on the market, rM, is 12 percent, Swanson's beta is 2.0, and the most recent dividend, D0, was R1.50, what is the most likely market price and P/E ratio (P0/E1) for Swanson's shares today?

Question

Quizplus · Accepted Answer

The correct answer is A because the most likely market price and P/E ratio (P0/E1) for Swanson's shares today is R27.50 and 5.0x, respectively. This is calculated using the Gordon Growth Model, which takes into account the company's retention rate, earnings growth rate, risk-free rate, expected return on the market, and beta.

Over the Past Few Years, Swanson Company Has Retained, on the Average