Even Better Products has come out with an even better product. As a result, the firm projects an ROE of 20%, and it will maintain a plowback ratio of 0.30. Its earnings this year will be $2 per share. Investors expect a 12% rate of return on the stock. a. At what price and P/E ratio would you expect the firm to sell? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Question

Business

Campbell Shea

29 August, 06:32

Even Better Products has come out with an even better product. As a result, the firm projects an ROE of 20%, and it will maintain a plowback ratio of 0.30. Its earnings this year will be $2 per share. Investors expect a 12% rate of return on the stock. a. At what price and P/E ratio would you expect the firm to sell? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

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Answers (1)

Know the Answer?

Ruth Joseph · Answer 1

Current Price is $23.33

P/E ratio is 11.66

Explanation:

Computing the P/E ratio by dividing the current price with the projected earnings:

P/E ratio = Current Price / Projected earnings

where

Current Price is to be computed as:

Current Price = EPS * (1 - Plow back ratio) / Rate of return - (ROE - Plow back ratio)

= $2 * (1 - 0.30) / 0.12 - (0.20 * 0.30)

= $2 * 0.7 / 0.12 - 0.06

= $1.4 / 0.06

= $23.33

Projected earnings is $2

Putting the values above:

= $23.33 / $2

= 11.66