Question
In: Finance
Assuming all the following firms have a required return of 9 percent, which would you expect...
Assuming all the following firms have a required return of 9 percent, which would you expect to have a positive present value of growth opportunities?
A) A firm with a P/E ratio of 8
B) A firm with a P/E ratio of 13
C) A firm with an E/P ratio of .10
D) A firm with an E/P ratio of .20
E) None of the answers are correct
Solutions
Expert Solution
| Solution: | ||||||
| Required Rate of Return : 9% | ||||||
| We know that Cost of Equity : 1/PE ratio | ||||||
| Calculation of Cost of Equity : | ||||||
| - A firm with P/E ratio : 8, hence Cost of Equity : | 1/ 8 = | 0.13 | or 13% | |||
| - A firm with P/E ratio : 13, hence Cost of Equity : | 1/13 = | 0.08 | or 8% | |||
| - A firm with E/P ratio : 0.10, hence Cost of Equity : | 0.10 | or 10% | ||||
| - A firm with E/P ratio : 0.20, hence Cost of Equity : | 0.20 | or 20% | ||||
| We know that , for a growing firm it is necessary to have its required rate of return | ||||||
| higher that its cost of equity. | ||||||
| In all the provided options firm with the P/E Ratio 13 will have Cost of Equity = 8% | ||||||
| and it is less than the Reuired Rate of return of 9%, in compare to other options | ||||||
| Hence, Option B is correct | ||||||
jeff jeffy answered 1 year agoRelated Solutions
Consider four different stocks, all of which have a required return of 17 percent and a...
Consider four different stocks, all of which have a
required return of 17 percent and a most recent dividend of GHS4.50
per share. Stocks A, B, and C are expected to maintain constant
growth rates in dividends for the foreseeable future of 10 percent,
0 percent, and -5 percent per year, respectively. Stock D is a
growth stock that will increase its dividend by 30 percent for the
next two years and then maintain a constant 8 percent growth rate...
Consider four different stocks, all of which have a required return of 15 percent and a...
Consider four different stocks, all of which have a required
return of 15 percent and a most recent dividend of $4.20 per share.
Stocks W, X, and Y are expected to maintain constant growth rates
in dividends for the foreseeable future of 10 percent, 0 percent,
and –5 percent per year, respectively. Stock Z is a growth stock
that will increase its dividend by 20 percent for the next two
years and then maintain a constant 10 percent growth rate...
Consider four different stocks, all of which have a required return of 12 percent and a...
Consider four different stocks, all of which have a required
return of 12 percent and a most recent dividend of $3.00 per share.
Stocks W, X, and Y are expected to maintain constant growth rates
in dividends for the foreseeable future of 10 percent, 0 percent,
and –4 percent per year, respectively. Stock Z is a growth stock
that will increase its dividend by 20 percent for the next two
years and then maintain a constant 10 percent growth rate...
Consider four different stocks, all of which have a required return of 20 percent and a...
Consider four different stocks, all of which have a required
return of 20 percent and a most recent dividend of $4.90 per share.
Stocks W, X, and Y are expected to maintain constant growth rates
in dividends for the foreseeable future of 10 percent, 0 percent,
and –5 percent per year, respectively. Stock Z is a growth stock
that will increase its dividend by 20 percent for the next two
years and then maintain a constant 15 percent growth rate...
Consider four different stocks, all of which have a required return of 18.75 percent and a...
Consider four different stocks, all of which have a required
return of 18.75 percent and a most recent dividend of $3.20 per
share. Stocks W, X, and Y are expected to maintain constant growth
rates in dividends for the foreseeable future of 10 percent, 0
percent, and –5 percent per year, respectively. Stock Z is a growth
stock that will increase its dividend by 20.75 percent for the next
two years and then maintain a constant 12 percent growth rate,...
Consider four different stocks, all of which have a required return of 20 percent and a...
Consider four different stocks, all of which have a required
return of 20 percent and a most recent dividend of $3.10 per share.
Stocks W, X, and Y are expected to maintain constant growth rates
in dividends for the foreseeable future of 10 percent, 0 percent,
and –5 percent per year, respectively. Stock Z is a growth stock
that will increase its dividend by 20 percent for the next two
years and then maintain a constant 12 percent growth rate...
Consider four different stocks, all of which have a required return of 15 percent and a...
Consider four different stocks, all of which have a required
return of 15 percent and a most recent dividend of $4.20 per share.
Stocks W, X, and Y are expected to maintain constant growth rates
in dividends for the foreseeable future of 10 percent, 0 percent,
and –5 percent per year, respectively. Stock Z is a growth stock
that will increase its dividend by 20 percent for the next two
years and then maintain a constant 10 percent growth rate...
Consider four different stocks, all of which have a required return of 15 percent and a...
Consider four different stocks, all of which have a required
return of 15 percent and a most recent dividend of $3.25 per share.
Stocks W, X, and Y are expected to maintain constant growth rates
in dividends for the foreseeable future of 7.5 percent, 0 percent,
and -5 percent per year, respectively. Stock Z is a growth stock
that will increase its dividend by 30 percent for the next two
years and then maintain a constant 8 percent growth rate...
Consider four different stocks, all of which have a required return of 15 percent and a...
Consider four different stocks, all of which have a required
return of 15 percent and a most recent dividend of $3.30 per share.
Stocks W, X, and Y are expected to maintain constant growth rates
in dividends for the foreseeable future of 10 percent, 0 percent,
and –5 percent per year, respectively. Stock Z is a growth stock
that will increase its dividend by 20 percent for the next two
years and then maintain a constant 12 percent growth rate...
Consider four different stocks, all of which have a required return of 18 percent and a...
Consider four different stocks, all of which have a required
return of 18 percent and a most recent dividend of $3.55 per share.
Stocks W, X, and Y are expected to maintain constant growth rates
in dividends for the foreseeable future of 11.5 percent, 0 percent,
and –6 percent per year, respectively. Stock Z is a growth stock
that will increase its dividend by 20 percent for the next two
years and then maintain a constant 13.5 percent growth rate,...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Respond to the following in a minimum of 175 words: Discuss what elements should be present...
- 1) The 3rd bright fringe of a double slit interference pattern is 30.0 cm above the...
- A solar cell generates a potential difference of 0.320 V when a 445.0 ? resistor is...
- A ceiling fan consists of a small cylindrical disk with 5 thin rods coming from the...
- You measure the following quantities as A = 1.0 m ± 0.2 m, B = 2.0...
- Froya Fabrikker A/S of Bergen, Norway, is a small company that manufactures specialty heavy equipment for...
- When the electricity goes out on your campus, a backup source powers the servers that handle...
ADVERTISEMENT