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The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12%, and its expected EPS is $5. If the firm's plowback ratio is 60%, its P/E ratio will be ________. Group of answer choices 22.22 7.14 16.67 14.29

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The Price-earnings ratio of Aberdeen Wholesale Company equals to 14.29.

What is a P/E ratio?

Its means the Price-earnings ratio which is used to value a companies by comparing the company's share price to its earnings per share.

Given data

Market capitalization rate = 10%

Expected ROE = 12%

Expected EPS = $5

Plowback ratio is 60%

What is the Dividend payout ratio?

= 1 - 0.6

= 0.4

What is the Expected dividend?

= 0.4 × $5

= $2

What is the Growth rate?

= 0.6 * 12%

= 7.2%

What is the Firm Value?

= $2 / (0.10 - 0.072)

= $2 / 0.028

= $71.43

What is the P/E ratio?

= $71.43 / $5

= 14.286

= 14.29

Hence, the Price-earnings ratio of Aberdeen Wholesale Company equals to 12.5.

Therefore, the Option D is correct.

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