A firm has recently reported earnings per share of $ 14.00 and paid dividends per share of $6.77. The earnings have grown 5% a year. The shares have a beta of 1.20. The Treasury bond rate is 2% and the return on the market is 9.5%. Estimate the P/E ratio of the firm.

A firm has recently reported earnings per share of $ 14.00 and paid dividends per share of $6.77. The earnings have grown 5% a year. The shares have a beta of 1.20. The Treasury bond rate is 2% and the return on the market is 9.5%. Estimate the P/E ratio of the firm.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Assume that you are on the financial staff of ABC Enterprises, and you have collected the following data: (1) The yield to maturity on the company's outstanding 10% annual coupon bonds is 8%, and its tax rate is 25%. (2) The risk-free rate is 2%, the market risk premium (rM - rRF) is 5.5%, and the firm's beta is 1.20. (3) The firm's capital structure consists of 40% debt and 60% equity. What is ABC's WACC? a . 6.50% b. 7.14% c. 7.56% d. 7.90% e. 8.60%
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