The required rate of return on equity for Parker will be 12.89% = 6.75% + 1.17(12.00% − 6.75%) and the firm pays 80% (1.40 / 1.75) of its earnings as dividends.
Forward P/E ratio = 0.80 / (0.1289 - 0.0600) = 11.61
Where r = required rate of return on equity, gn = growth rate in dividends (forever).
