The market capitalization rate on the stock of Flexsteel 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 _________.
A)7.69
B)8.33
C)9.09
D)11.11
E)none of the above

Question

Quizplus · Accepted Answer

P/E ratio = (Market capitalization rate) / (ROE x Plowback ratio)
Plowback ratio = 50% = 0.5
ROE = 13%
EPS = $3.60
Therefore, DPS (Dividend per share) = EPS x (1 - Plowback ratio) = $3.60 x (1 - 0.5) = $1.80

Market capitalization rate = 12% = 0.12
P/E ratio = 0.12 / (0.13 x 0.5) = 9.09

The Market Capitalization Rate on the Stock of Flexsteel Company