Tayco Corporation has just paid dividends of $3 per share. The earnings per share for the company was $4. If you believe that the appropriate discount rate is 15 percent and the long-term growth rate in dividends is 6 percent, and earnings is 6 percent, then the firm's P/E ratio is

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Quizplus · Accepted Answer

The P/E ratio can be calculated using the Gordon Growth Model: P = D1 / (r - g). Here, D1 = $3 * (1 + 0.06) = $3.18, r = 0.15, g = 0.06. So, P = $3.18 / (0.15 - 0.06) = $35.33. The P/E ratio is then P/E = $35.33 / $4 = 8.83, which is closest to 8.33.

Tayco Corporation Has Just Paid Dividends of $3 Per Share