The Risk-Free Rate Is 10 Percent, and the Expected Return

question 35

Essay

The risk-free rate is 10 percent, and the expected return for the stock market is 16 percent. Evergreen Inc. has a beta of 1.1, and investors expect dividends and earnings to grow at 8 percent per year. The current dividend is $1.20 and the payout ratio is 50 percent.
(a) Calculate the P/E ratio for Evergreen Inc.
(b) Estimate the price of the stock for the next year using the multiplier model.

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Definitions:

Creditor

An individual, organization, or other entity that lends money or extends credit to another party.

Asset

An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide future benefit.

Invested Cash

Funds that are placed into a business by its owners or shareholders with the expectation of generating profits or income.

Capital

The financial resources or assets owned by an individual or business, often used to generate income or produce goods and services.