Consider two zero-growth mature firms where all earnings are paid out as dividen
ID: 2621032 • Letter: C
Question
Consider two zero-growth mature firms where all earnings are paid out as dividends, and investors in both firms require a return of 12%. Both firms ABC and XYZ just earned $10 million dollars over the last year. Firm ABC has 10 million shares outstanding, but XYZ has 20 million shares outstanding.
The current stock price per share of ABC = $______ ,
A-$16.66
B-$8.33
C-$4.17
D-$2.00
and the current stock price per share of XYZ = $______.
A-$16.66
B-$8.33
C-$4.17
D-$2.00
The PE ratio for ABC = ______,
A-$16.66
B-$8.33
C-$4.17
D-$2.00
and the PE ratio for XYZ =______ .
A-$16.66
B-$8.33
C-$4.17
D-$2.00
Explanation / Answer
dividend of ABC = 1
Dividend of XYZ = 10/20 = 0.5
Price of ABC = 1/0.12 = 8.33
price of XYZ = 0.5/0.12 = 4.17
PE for ABC = 8.33/1 = 8.33
PE for XYZ = 4.17/0.5 = 8.33
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