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% and the long term growth rate in dividends is 6%, and earnings is 6%, then what is the firm's P/E ratio?
A) 8.33
B) 33.33
C) 44.44
D) 11.11
E) None of the above

Question

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