The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12%, and its expected EPS is $5. If the firm's plowback ratio is 50%, its P/E ratio will be ________.

Question

Quizplus · Accepted Answer

Dividend payout ratio = 1 − 0.5 = 0.5
Expected dividend = 0.5 × $5 = $2.50
Growth rate = 0.5 × 12% = 6%
Value = $2.50/(0.10 − 0.06) = $62.50
P/E = $62.50/$5 = 12.5

The Market Capitalization Rate on the Stock of Aberdeen Wholesale