Suppose a firm has just reported an EPS of $2.50 and expects to maintain a dividend payout ratio of 40 percent.If the firm's price-earnings ratio is 9.3 and its return on equity is 12 percent,what is its required rate of return?

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Quizplus · Accepted Answer

Compute retention ratio = 1 - 40% = 60% g = 12%*60% = 7.2%,D₀=2.5*0.4=1, P₀ = EPS1*justified PE ratio=2.5*(1+0.072)*9.3=2.68*9.3 r = D0*(1+g)/P +g r = [(1.072/2.68)/9.30]+7.2% = 11.50%

Suppose a Firm Has Just Reported an EPS of $2