Question

Check the correct statement

f a firm reinvests its earnings at an ROE equal to the market capitalization rate, then its earnings-price (E/P) ratio is equal to the market capitalization rate.

The value of a share equals the present value of all future dividends per share.

If a security is underpriced, then the expected holding period return is above the market capitalization rate.

The value of a share equals the present value of earnings per share assuming the firm does not grow, plus the NPV of all future investments.

The value of the equity equals the present value of all future payouts (dividends plus repurchases).

Everything else equal, the higher the risk of the stock, the higher the P/E ratio.

Everything else equal, the higher the plowback ratio, the higher the P/E ratio.

Everything else equal, the higher the risk of the stock, the lower the P/E ratio.

Everything else equal, the higher the plowback ratio, the lower the P/E ratio.

Everything else equal, the higher the expected dividend growth rate, the higher the P/E ratio.

Answer 1

The true statements are

• The value of a share equals the present value of all future dividends per share.
• If a security is underpriced, then the expected holding period return is above the market capitalization rate.
• The value of a share equals the present value of earnings per share assuming the firm does not grow, plus the NPV of all future investments.
• Everything else equal, the higher the risk of the stock, the lower the P/E ratio.
• Everything else equal, the higher the plowback ratio, the lower the P/E ratio.
• Everything else equal, the higher the expected dividend growth rate, the higher the P/E ratio.