A) XXX Corp. has a ROE equal to 10% and it consistently pays out 30% of earnings as dividends. Investors expect a return of 10% on the stock. The implied P/E ratio for XXX is (closest answer):
a) 3.6
b) 4.7
c) 7.0
d) 10.0
e) 12.5
B) Now suppose two stocks: Stock X and stock Y are expected to pay $ 2/share in dividend at the end of the year. Stock X’s dividend is supposed to grow at 3% per year, while stock Y’s dividend is supposed to grow at 2% per year. Both stock’s have similar risk and have a market capitalization rate of 12%. Stock X’s price should be:
a) Greater than stock Y’s price
b) Smaller than stock Y’s price
c) Equal to stock Y’s price
d) Not enough information