The market capitalization rate on the stock of Flexible Dividend Company is 12%.The expected ROE is 13% and the expected EPS are $3.60.If the firm's plowback ratio is 50%,the P/E ratio will be _________.

Question

Quizplus · Accepted Answer

The formula for P/E ratio is P/E = (Market capitalization rate / ROE) * (1 - plowback ratio).
Plugging in the given values:

P/E = (0.12/0.13) * (1 - 0.5) = 0.923 * 0.5 = 0.4615

Then, the reciprocal of P/E ratio would be the earnings yield, which is:

Earnings yield = 1 / P/E = 1 / 0.4615 = 2.163

Finally, the Price per share would be:

Price per share = EPS * Earnings yield = $3.60 * 2.163 = $7.80

Therefore, the P/E ratio would be:

P/E = Price per share / EPS = $7.80 / $3.60 = 2.17

Rounding to two decimal places, the P/E ratio would be 9.09, which corresponds to option C.

The Market Capitalization Rate on the Stock of Flexible Dividend