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  1. business
  2. accounting
  3. company a and company b are both gas retailers and

Company A and company B are both gas retailers and both expect to generate earnings...

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Accounting

Company A and company B are both gas retailers and both expect to generate earnings per share (EPS) of $5.00 over the next year (t=1). Each earns 12% return on new investment (ROE). The cost of equity capital is 10%p.a.for both companies. Company A plans to pay a dividend of $2.50 in exactly one year from now, and to maintain that 50% payout ratio forever. Company B plans to pay out all of its earnings as dividends at the end of the year. It does not expect to change this policy. What is the forward (leading) Price-Earnings ratio (PE) for each of Company A and B?

Select one:

A.

Both have a PE of 10

B.

Company A's PE= 25; Company B's PE= 10

C.

Company A's PE= 10; Company B's PE= 25

D.

Company A's PE=12.5; Company B's PE=10

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