Castles in the sand generates a rate of return
Course:- Managerial Accounting
Reference No.:- EM13940317

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Castles in the Sand generates a rate of return of 20% on its investments and maintains a plow back ratio of .30. Its earnings this year will be $4 per share. Investors expect a 12% rate of return on the stock.

a. Find the price and P/E ratio of the firm.

b. What happens to the P/E ratio if the plow back ratio is reduced to .20?

c. Show that if plow back equals zero, the earnings-price ratio, E/P, falls to the expected rate of return on the stock.

Rate of return.......... 20.00%
Plow back ratio... ..... 0.30 
Earnings this year ......$4.00
Expected rate of return....12.00%
Plow back ratio (b) ...... 0.20
Plow back ratio (c) ......0.00 

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