solution

You have been reading about the Madison Computer Company (MCC), which currently retains 88 percent of its earnings ($8 a share this year). It earns an ROE of almost 33 percent.

1. Assuming a required rate of return of 14 percent, how much would you pay for MCC on the basis of the earnings multiplier model? Do not round intermediate calculations. Round your answer to the nearest cent. Enter zero if the obtained answer is economically meaningless.

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2. What would you pay for Madison Computer if its retention rate was 57 percent and its ROE was 20 percent? Do not round intermediate calculations. Round your answer to the nearest cent. Enter zero if the obtained answer is economically meaningless.