Question
1. Stormy Weather has no attractive investment opportunities. Its return on equity equals the discount rate, which is 10%. Its expected earnings this year are
1. Stormy Weather has no attractive investment opportunities. Its return on equity equals the discount rate, which is 10%. Its expected earnings this year are $3 per share. Complete the following table. (Leave no cells blank. Enter a zero, wherever necessary. Do not round intermediate calculations. Round growth rate to two decimal places.)
2. Trend-Line Inc. has been growing at a rate of 6% per year and is expected to continue to do so indefinitely. The next dividend is expected to be $8 per share. a. If the market expects a 10% rate of return on Trend-Line, at what price must it be selling? (Do not round intermediate calculations.) b. If Trend-Lines earnings per share will be $12 next year, what part of its value is due to assets in place? (Do not round intermediate calculations.)
c. If Trend-Lines earnings per share will be $12 next year, what part of its value is due to growth opportunities? (Do not round intermediate calculations.)
3. No-Growth Industries pays out all of its earnings as dividends. It will pay its next $4 per share dividend in a year. The discount rate is 21%.
a. What is the price-earnings ratio of the company? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b. What would the P/E ratio be if the discount rate were 5%? (Round your answer to 2 decimal places.
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