Question #117
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 47
Status: Unattempted
Question
A firm has the following characteristics: Current share price $100.00. Current earnings $3.50. Current dividend $0.75. Growth rate 11%. Required return 13%. Based on this information and the Gordon growth model, what is the firm's justified trailing price to earnings (P/E) ratio?
Answer Choices:
A. 11.3
B. 8.9
C. 11.9
Explanation
The justified trailing P/E is 11.9:
P0 / E0 = [($0.75)(1 + 0.11)/$3.50] / (0.13 – 0.11) = 11.8929