Question
Suppose that CleanAir Co., a renewable energy startup, currently has earnings of $10 per share and that Rina anticipates the earnings per share to grow
Suppose that CleanAir Co., a renewable energy startup, currently has earnings of $10 per share and that Rina anticipates the earnings per share to grow by 4 percent per year. Using a mean industry PE ratio of 13 and the expected annual growth rate on the firms existing earnings, the estimated stock price in three years is:
$141.84
$146.23
$150.62
$157.93
Suppose CleanAir Co. is expected to pay a dividend of $5 per share over the next three years, that Rinas required rate of return is 15 percent, and that she plans to sell the stock at the end of the three-year time period. Under these circumstances, using the adjusted dividend discount model, the value of the stock today is:
$96.81 per share
$107.57 per share
$110.80 per share
$115.10 per share
Which of the following are limitations to the price-earnings model? Select all that apply.
It assumes that the dividend growth rate will never be lower than the required rate of return.
It can result in inaccurate valuations when the expected growth in the firms future earnings are incorrectly estimated.
It can result in inaccurate valuations when investors rely on an industry price-earnings ratio that assigns incorrect weighting to various industry firms.
It can result in inaccurate valuations when a stock buyback occurs unexpectedly.
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