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    Calculating price and price earning ratio in the given cases

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    Castles in the Sand generates a rate of return of 15% on its investments and maintains a plowback ratio of .20. Its earnings this year will be $2 per share. Investors expect a 12% rate of return on the stock.

    a. Find the price and P/E ratio of the firm. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

    b. Find the price and P/E ratio of the firm, if the plowback ratio is reduced to .10? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

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    Solution Preview

    a. Find the price and P/E ratio of the firm. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

    Current earnings=Eo=$2
    Plowback ratio=b=0.20
    Discount rate=k=12%
    Rate of return=r=15%
    Growth ...

    Solution Summary

    The solution describes the steps to calculate price and price earning ratio in the given cases.

    $2.19