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30 December, 10:28

Public Imagination, Ltd. has an ROE of 16%, a plowback ratio of 75%, earnings for next year of $2 per share, and its stock has a required return of 18%. What is the current stock price for PIL?

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  1. 30 December, 12:55
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    The current stock price is $33.33

    Explanation:

    The plowback ratio is also known as the retention ratio (RR).

    The growth rate or the sustainable growth rate is the rate at which the dividends will increase every year indefinitely.

    Thus, the growth rate in dividends is = ROE * RR

    g = 0.16 * 0.75 = 0.12 or 12%

    The current stock price is = D1 / (r - g)

    Thus, current price = 2 / (0.18 - 0.12) = $33.33
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Home » Business » Public Imagination, Ltd. has an ROE of 16%, a plowback ratio of 75%, earnings for next year of $2 per share, and its stock has a required return of 18%. What is the current stock price for PIL?
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