Question

The Market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its market ratio will ROE is 12%, and its expected EPS is S5. If the firm's plowback ratio is 50%, its P/E be

A. 8.33
B. 12.5
C. 19.23
D. 24.15

Answer 1

The P/E ratio for Aberdeen Wholesale Company cannot be accurately determined based on the given data.

Step-by-step explanation:

The P/E ratio can be calculated using the formula:

P/E ratio = Market price per share / Earnings per share (EPS)

Given that the expected EPS is $5 and the plowback ratio is 50% (also known as the retention ratio), we can calculate the dividend payout ratio as 1 minus the plowback ratio.

Dividend Payout Ratio = 1 - Plowback Ratio = 1 - 0.5 = 0.5

Since the ROE is 12%, we can calculate the dividend growth rate (g) using the formula:

ROE = Dividend Payout Ratio * ROE = 0.5 * 12% = 6%

Using the Gordon growth model, we can calculate the required rate of return (k) using the formula:

k = Dividend Yield + g

Given that the market capitalization rate is 10%, we can calculate the dividend yield as:

Dividend Yield = Market Capitalization Rate - g = 10% - 6% = 4%

Finally, we can calculate the P/E ratio as:

P/E ratio = 1 / (k - g) = 1 / (4% - 6%) = -25

Since a negative P/E ratio doesn't make sense, we can conclude that there is an error in the data provided or in the calculations.