For the year just ended，N company had an earnings of$2 per share and paid a pidend of $1．2 0n its Stock．The growth rate in net income and pidend are both expected to be a constant 7 percent per year,indefinitely．N company has a Beta of 0．8，the risk-free interest rate is 6 percent，and the market risk premium is 8 percent．

P Company is very similar to N company in growth rate，risk and pidend payout rati0．It had 20 million shares outstanding and an earnings of$36 million for the year just ended．

The earnings will increase to$38．5 million the next year．

Requirement：

A．Calculate the expected rate of return on N company’S equity．

B．Calculate N Company’S current price—eaming ratio and prospective price-earning rati0．

C．Using N company’S current price-earning rati0，value P company’S stock price．

D．Using N company’S prospective price-earning rati0，value P company’S stock price．

A.The expected rate of return on N company’s equity=6%+0.8×8%=12.4%　　B.current price-earning ratio=(1.2/2) ×(1+7%)/(12.4%-7%)=11.89　　Prospective price-earning ratio=(1.2/2)/(12.4%-7%)=11.11　　C.P company’s stock=11.89×36/20=21.4　　D.P company’s stock=11.11