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Question:

Pam Robers, CFA, is performing a valuation analysis on the common stock of Allstare Inc. The stock’s beta is 1.1, the risk-free rate is 5%, and the market risk premium is expected to be 8%. Allstare’s ROE is expected to be constant at 18%, and its dividend payout ratio has been fairly constant over time at 40%. The forward-earnings multiplier that Robers should use to estimate the current value of the shares is closest to:

A 13.
explanation

1212Required return = 5% + 1.1(8%) = 13.8%
Sustainable growth = 18%(1 - 0.4) = 10.8%

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