If the market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. its P/E ratio will be B.14.29.
What is the P/E ratio?
The ROE formula is:
ROE = Net Income / Equity
Dividend payout ratio (DPR) = 1 - Plowback ratio
So,
ROE = Expected ROE * Plowback ratio
ROE = 0.12 * 0.60
= 0.072
Next, we calculate the dividend per share (DPS) using the formula:
DPS = EPS * DPR
DPS = $5 * (1 - 0.60)
= $5 * 0.40
= $2
Market price per share (P) using the formula:
P = EPS / (Market capitalization rate - ROE)
P = $2 / (0.10 - 0.072)
= $2 / 0.028
= $71.43
P/E ratio is:
P/E ratio = Market price per share / Earnings per share (EPS)
= $71.43 / $5
≈ 14.29
Therefore the correct answer is B. 14.29.