(4) Suppose one share of Company A pays out $10 per year and will do so forever. The interest rate is .04.

a) What is the present value of this earnings stream? What is the P/E (price to current earnings) ratio?

B) Suppose although it has been paying $10 per year, unexpectedly its earnings rise to $11 per year forever. What is its new share price?

C) Suppose the unexpected rise to $11 is only for the first year, after which its earnings revert to $10 per year forever. What is its share price now, at the beginning of the first year? What is its share price at the beginning of the next year?