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

Answer 1

First we will find out EPS

Earning per share (EPS)= Earnings / Number of shares

Earning per share of ABC= 10m/10m= 1

Earning per share of XYZ= 10m/20m= 0.50

A) Correct answer is option b.8.33

current market price of ABC= EPS/ required return

Current market price of ABC= 1/0.12= 8.33

Current market price of ABC is $8.33

B) Correct answer is option C.4.17

Current market price of XYZ= 0.50/0.12= 4.17

Current market price of XYZ is $4.17

C) Correct answer is option b.8.33

PE ratio= Market price per share / EPS

ABC= 8.33/1= 8.33

PE ratio of ABC is $8.33

D) Correct answer is option b.8.33

PE ratio= Market price per share / EPS

= 4.17/0.5= 8.33

PE ratio is XYZ is $8.33