Equity Investments Q238
238An investor gathers the following data:
| ROE | 15% |
| Retention Ratio | 70% |
| Required Return on Shares | 12% |
| Next Year’s EPS | $5 |
The justified forward P/E is closest to:
- Option : B
- Explanation : Growth = Retention Ratio * ROE = 0.7 * 0.15 = 0.105 Justified Forward PE = Payout Ratio / (r - g) = (1 - 0.7) / (0.12 - 0.105) = 20
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