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 0.03. Its earnings this year will be $2 per share. Investors expect a 12% rate of return on the stock.

Question

Business

Davion Stone

15 December, 18:29

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 0.03. Its earnings this year will be $2 per share. Investors expect a 12% rate of return on the stock.

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Jillian Choi · Answer 1

Price $17

PE ratio 8.5 times

Explanation:

As per given data

ROE = 20%,

Plowback ratio = b = 0.03,

EPS = $2,

k = 12%

As plowback referr to the retentrion value, deducting its effect from EPS

Dividend = EPS * (1 - b) = $2 * (1 - 0.03) = $1.94

Growth = ROE x b = 20% x 0.03 = 0.006 = 0.6%

Using Dividendvaluation method we will calculate the price.

Price = Dividend / (Rate of return - Growth rate)

Price = $1.94 / (12% - 0.6%) = $17

P / E Ratio = Price / EPS = $17 / $2 = 8.5