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Answer: Equal to the peer group's justified forward P/E.
The company's justified forward P/E is calculated as the dividend payout ratio divided by the difference between the required rate of return and the dividend growth rate. For the company, this is 0.40 / (0.09 - 0.05) = 10.0. For the peer group, it is 0.50 / (0.09 - 0.04) = 10.0. Since both values are equal, the correct answer is **B**. The candidate may incorrectly choose **A** or **C** if they misinterpret the impact of the payout ratio or growth rate on the P/E.
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An analyst gathers the following information about common shares:
Company Peer Group Dividend payout ratio 40% 50% Estimated future dividend growth rate 5% 4%
If the investor's required rate of return is 9%, the company's justified forward P/E is:
A
Less than the peer group's justified forward P/E.
B
Equal to the peer group's justified forward P/E.
C
Greater than the peer group's justified forward P/E.