Union Enterprise has an expected profit margin of 12 percent,turnover ratio of 1.5,and a leverage ratio of 0.8.Union plans to distribute 45 percent of its expected earnings of $1 million as a dividend next year.What is the firm's P/E ratio if the risk-free rate is 4.75 percent and the risk premium associated with the shares is 6.75 percent?

Question

Quizplus · Accepted Answer

Compute retention ratio = 1-45% = 45% = 55%,ROE = 12%*1.5*0.8 = 14.4%
g = 14.4%*55% = 7.92%,then P/E = 0.45/(11.5% -7.92%)= 12.57

Union Enterprise Has an Expected Profit Margin of 12 Percent,turnover