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?(Relative valuation of common? stock)
Using the ?P/E ratio approach to? valuation, calculate the value of a share of stock under the following? conditions:
The? investor's required rate of return is 12 ?percent, the expected level of earnings at the end of this year ?(Upper E1) is ?$4 the firm follows a policy of retaining 60 percent of its? earnings, the return on equity?(ROE?) is 16 ?percent, and similar shares of stock sell at multiples of 16.668 times earnings per share.
Now show that you get the same answer using the discounted dividend model.
a. The stock price using the ?P/E ratio valuation method is ?$.
(Round to the nearest? cent.)
b. The stock price using the dividend discount model is $.
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