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Question:
If the analyst believes next year’s earnings will be $4 per share, what value should be placed on this stock?
A
$33.32.
explanation
1212Dividend payout = 1 - earnings retention rate = 1 - 0.4 = 0.6
g = (retention rate)(ROE) = 0.4(0.12) = 0.048
Price = E(P/E) = 4(8.33) = 33.32
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