Use the equation P0 = (K EPS1 ) /r-g) to demonstrate the ...

[DyllonKazuo]

Use the equation P0 = (K  EPS1 ) /r-g) to demonstrate the relationship between the price-earnings model and the constant growth dividend model.
 
  P0 = the current price per share of stock, K = the dividend payout ratio, is the forward looking earnings per share, r is the required rate of return for common stock, and g is the anticipated constant rate of growth.

Question 2

Which one of the following investment programs invests the savings fund almost entirely in the sponsoring company's stock?
 
  A)
 
  ESOP
  B)
 
  SEP
  C)
 
  IRA
  D)
 
  SRA

[wfdfwc23]

Answer to Question 1

=
Using algebra we see that, all else equal, the forward-looking price-earnings multiple is directly related to growthbecause a higher g is associated with a higher P0/EPS1and inversely related to riskbecause a higher r (the expected or required return by common share investors) is associated with a lower P0/EPS1.

Answer to Question 2

A