Assuming you want to earn a return of 10% and ignoring taxes, what multiple of earnings should you pay for the following business:
- return on equity equals 15%
- the business pays out 60% of its earnings as dividends, and reinvests the other 40%. You expect it to also earn 15% on the reinvested earnings?
I’ll even let you have multiple choice:
Tomorrow, I’ll give the answer and explain why this little question is important.