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Question #4: Stock Valuation and P/E Ratio [16 Points] The research analyst at Ares Capital...

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Finance

Question #4: Stock Valuation and P/E Ratio [16 Points] The research analyst at Ares Capital Management believes that Dolphin Entertainment, Inc (DLPN) has a return on equity (ROE) of 13% with a beta () of 1.9. Dolphin Entertainment, Inc plans to maintain indefinitely its plowback ratio of 0.70. The firms earnings this year (E0) were equal to $0.80 per share. The research analyst estimates that the expected return this year for the market E(rm) will equal 12.6% and that the risk free rate will be 2.2% (rf = 0.022). (a) Find the price at which a share of DLPN should sell. Round your answer to 2 decimal places. [5 Points] (b) Calculate the P/E ratio for Dolphin, Inc. Round your answer to 2 decimal places. [3 Points] (c) Suppose the research analyst publishes a report stating that they believe that Dolphin, Inc. will soon raise its plowback ratio to 0.80. If youre a current stockholder in DLPN should you purchase more stock or sell your position? Assume that the stock is currently trading at the value you found in Part (a). Explain your reasoning. [Hint: Earnings next year will change.] [8 Points]

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