Consider a company that pays out all its earnings (i.e., the payout ratio = 1 or plowback/retention ratio=0). The required return for the firm is 13%. Compute the intrinsic P/E if its ROE is 15%. Compute the intrinsic P/E if its ROE is 20%. Discuss why your answers to parts (a) and (b) differ or do not differ from one another. Suppose that the company’s ROE is 13%. Compute its intrinsic P/E value. Would the answer to part (d) change if the company retained half of its earnings instead of paying all of them out? Discuss why or why not.

Sustainable growth rate “g” is determined using the formula: When the payout is 1 or 100% or…

Answered: Consider a company that pays out all…

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter7: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 63P

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Consider a company that pays out all its earnings (i.e., the payout ratio = 1 or plowback/retention ratio=0). The required return for the firm is 13%.

Compute the intrinsic P/E if its ROE is 15%.
Compute the intrinsic P/E if its ROE is 20%.
Discuss why your answers to parts (a) and (b) differ or do not differ from one another.
Suppose that the company’s ROE is 13%. Compute its intrinsic P/E value.
Would the answer to part (d) change if the company retained half of its earnings instead of paying all of them out? Discuss why or why not.

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