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I am really struggling with this homework problem. HELP!?

The market consensus is that Digital Electric Corporation has an ROE of 12% and a beta of 1.25. It plans to maintain indefinitely its traditional plowback ratio of 50%. This year's earnings were $3 per share and the annual dividend was just paid. The consensus estimate of the coming year's market return is 12% and T-bills currently offer a 5% return.

At what price should Digital trade? What is Digitals trailing and forward P/E ratios?

find price P0 = div 1 / r-g

div 1 = div 0 * (1+growth rate in dividend)

div 0 = $3*(1-retention ratio) = $3 * 50% = $1.5

r (using capm) = rf + beta(market return 鈥?risk free)
= .05 + 1.25(.12-.05) = 13.75%


g = roe * b(retention (aka plowback) ratio) = 12% * 50% = 6%

div 1 = $1.5 * (1+.06) = $1.59

so, P0 = $1.59/(.1375-.06) = $20.516

trailing P/E = P0/E0
= $20.516/$3 = 6.84

leading P/E = P0/E1
E1 = $3 * (1+.06)
= $3.18
P0/E1 =
$20.516/$3.18 = 6.45

If you need an explanation, please ask, and I will tell you

What about the third part of question: at what price should the stock be trading? By the way where is it quoted? What is the ticker? Report It

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