Question #51
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 20
Status: Unattempted
Correct Answer: A
Question
A firm has the following characteristics: Current share price $100.00. Next year's earnings $3.50. Next year's dividend $0.75. Growth rate 11%. Required return 13%. Based on this information and the Gordon growth model, what is the firm's justified leading price to earnings (P/E) ratio?
Answer Choices:
A. 8.7
B. 11.3.
C. 10.7.
Explanation
The justified leading P/E is 10.7:
P0 / E1 = (D1 / E1) / (r−g) = ($0.75 / $3.50) / (0.13 – 0.11) = 10.71