(Relative valuation of common stock). Using P/E ratio approach to valuation calculate the value of a share of stock under the following conditions. .
The investor require rate of return is 14 percent,
the expected level of earnings at the end of this year( E1) is $ 6.
the firm follow a policy of retaining 40 percent of its earnings,
the return on equity ( ROE) is 13 percent and
similar shares of stock sell at multiple of 8.108 times earnings per share
Now show that you get same answer using the discounted dividends model .
a) The stock price using the P/E ratio valuation method is…… ( around to nearest cent)
b) The stock price using the dividends discount model is ……… ( around to nearest cent)