Question
Can someone please help me with the following question: Consider a firm that is expected to earn $5 per share next year. EPS will continue
Can someone please help me with the following question:
Consider a firm that is expected to earn $5 per share next year. EPS will continue at this level in perpetuity without any additional investment. Investors require A 10% rate of return.
a) What is the price per share and P/E ration?
b) A new investment opportunity arises allowing the firm to plow back exactly $3 per share at the end of each of the next five years and nothing thereafter. Each invetsment is expected to earn a level annual return of 25% in perpetuity, starting the year after the investment is made. What is the new price per share and P/e ratio?
c) suppose the expected investment rate were only 10% in part b. what would be the new stock price? Show that the P/E ratio is the reciprocal of the interest rate in this case.
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