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Unformatted text preview: 111Earnings Multiplier Model•P/E Ratio: This values the stock based on expected annual earningsPrice/Earnings Ratio= Earnings Multiplier EarningsMonth 12ExpectedPriceMarket Current =112Earnings Multiplier Model•Combining the Constant DDM with the P/E ratio approach by dividing earnings on both sides of DDM formula to obtain •Thus, the P/E ratio is determined by–Expected dividend payout ratio–gkEDEPi=111/113Earnings Multiplier ModelAssume the following information for AGE stock (1) Dividend payout = 50% (2) Required return = 12% (3) Expected growth = 8% (4) D/E = .50 and the growth rate, g=.08. What is the stock’s P/E ratio? •What if the required rate of return is 13%•What if the growth rate is 9%7.1603./50..09.12.50P/E===.1005./50..08.13.50P/E===5.1204./50..08.12.50P/E===114Earnings Multiplier Model•In the previous example, suppose the current earnings of $2.00 and the growth rate of 9%. What would be the estimated stock price?...
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This note was uploaded on 01/24/2012 for the course FIN 4360 taught by Professor Davidbray during the Spring '12 term at Kennesaw.
 Spring '12
 DAVIDBRAY

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