A pharmaceutical company announces that it has received Federal Drug Administration approval for a new allergy drug that completely prevents hay fever. The consensus analyst forecast for the company's earnings per share (EPS) is $5.00, and insiders agree with analyst expectations. They too expect that, with this new drug, earnings will drive the EPS to $5.00. What will happen when the company releases its next earnings report? O The stock price will increase and settle at a new equilibrium level, There will be some volatility in the stock price when the earnings report is released; it is difficult to determine the impact on the stock price. O The stock price will not change, because the market already incorporated that information in the stock price when the announcement about FDA approval was made.

A pharmaceutical company announces that it has received Federal Drug Administration approval for a new allergy drug that completely prevents hay fever. The consensus analyst forecast for the company's earnings per share (EPS) is $5.00, and insiders agree with analyst expectations. They too expect that, with this new drug, earnings will drive the EPS to $5.00. What will happen when the company releases its next earnings report? O The stock price will increase and settle at a new equilibrium level, There will be some volatility in the stock price when the earnings report is released; it is difficult to determine the impact on the stock price. O The stock price will not change, because the market already incorporated that information in the stock price when the announcement about FDA approval was made.

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

See similar textbooks

Similar questions

An analyst for JPGR Bank & Trust is considering the value of ZBX stock. ZBX isn't currently paying dividends, but just announced that they will pay their first quarterly dividend of $1.40 per share, starting 5 quarters (1.25 years) from today. The analyst thinks its safe to assume that the firm will not increase the dividend anytime soon, and so will value it as if the dividend will not grow. Given this information, what would be the value of ZBX stock if using a required rate of return of 16% APR compounded quarterly? Enter answer in dollars and cents, rounded to the nearest cent.
The VSE Corporation currently pays no dividend because of depressed earnings. A recent change in management promises a brighter future. Investors expect VSE to pay a dividend of $0.5 next year (the end of year 1). This dividend is expected to increase to $1.25 the following year and to grow at a rate of 12 percent per annum for the following 2 years (years 3 and 4). Chuck Brown, a new investor, expects the price of the stock to increase 50 percent in value between now (time zero) and the end of year 3. If Brown plans to hold the stock for 2 years and requires a rate of return of 19 percent on his investment, what value would he place on the stock today? Use Table II to answer the question. Do not round intermediate calculations. Round your answer to the nearest cent. $
The common stock of Leaning Tower of Pita, Inc., a restaurant chain, will generate the following payoffs to investors next year: Probability Dividend Stock Price 0.3 $5 0.6 4 0.1 Boom Normal economy Recession $ 194 110 0 The company goes out of business if a recession hits. Calculate the expected rate of return and standard deviation of return to Leaning Tower of Pita share-holders. The stock is selling today for $100. (Round your answers to 2 decimal places.) Expected rate of return Standard deviation %
The common stock of Leaning Tower of Pita, Inc., a restaurant chain, will generate the following payoffs to investors next year: Probability 0.3 0.6 0.1 Boom Normal economy Recession Dividend Stock Price $6 4 0 $190 106 0 The company goes out of business if a recession hits. Calculate the expected rate of return and standard deviation of return to Leaning Tower of Pita share-holders. The stock is selling today for $96. (Round your answers to 2 decimal places.) Expected rate of return Standard deviation
The MM Company has fallen on hard times. Its management expects to pay no dividends for the next 2 years. However, the dividend for Year 3 (D3) will be $1.00 per share, and it is expected to grow at a rate of 3% in Year 4, 6% in Year 5, and 10% in Year 6 and thereafter. If the required return for MM Co. is 20%, what is the current equilibrium price of the stock?
Suppose that the consensus forecast of security analysts of your favorite company is that earnings next year will be $5.00 per share. The company plows back 50% of its earnings and if the Chief Financial Officer (CFO) estimates that the company's return on equity (ROE) is 16%. Assuming the plowback ratio and the ROE are expected to remain constant forever: Suppose you observe that the stock is selling for $50.00 per share, what would you conclude about either your belief of the stock’s required rate of return or the CFO’s estimate of the company’s return on equity? (select all that apply)
The common stock of Leaning Tower of Pita, Inc., a restaurant chain, will generate the following payoffs to investors next year: Dividend Stock Price $8 Boom Normal economy Recession Probability 0.35 0.5 0.15 0 $198 103. 10 The company goes out of business if a recession hits. Calculate the expected rate of return and standard deviation of return to Leaning Tower of Pita share-holders. The stock is selling today for $93. (Round your answers to 2 decimal places.) Expected rate of return Standard deviation
It is January 2023 and you are the CFO of MetrixSystems Corp. The firm only pays dividends. The firm is expecting earnings per share (EPS) of $10 at the end of this year. If the firm does not reinvest any of its earnings it will expect to achieve the same EPS of $10 each year in perpetuity. You are considering changing the dividend policy of the firm. Specifically, you want the firm to target a payout rate of 20% each year. The firm's return on new investment is 12.5% and its cost of equity capital (r) is 12%. Calculate the share price under the proposed payout policy. Select the best one. $93.75 -$2,250 $550 $83.33 O $100
On November 1, an analyst who has been studying a ﬁrm called Computer Sciences believes that the company will make a major announcement before the end of the year. Computer Sciences currently is priced at 27.63 and has a beta of 0.95. The analyst believes that the stock can advance about 10 percent if the market does not move. The analyst mm the market might decline by as much as 5 percent, leaving the stock with a return of 0.10 + (-0.05 x 0.95) = 0.0525. To capture the full 10 percent alpha, the analyst recommends the sale of a particular stock index futures. The March contract currently is priced at 393. Assume that the investor owns 100,000 shares of the stock. Set up a transaction by determining the appropriate number of futures contracts. Then determine the effective return on the stock if, on December 31, the stock is sold at 28.88, the futures contract 18' at 432.30, and the multiplier, is 500. Explain your results.
An investment counselor calls with a hot stock tip. He believes that if the economy remains strong, the investment will result in a profit of $30,000. If the economy grows at a moderate pace, the investment will result in a profit of $20,000. However, if the economy goes into recession, the investment will result in a loss of $30,000. You contact an economist who believes there is a 20% probability the economy will remain strong, a 70% probability the economy will grow at a moderate pace, and a 10% probability the economy will slip into recession. What is the expected profit from this investment?
Suppose that the probability that the economy will be in a recession one year from now is 0.25. If the economy is in a recession one year from now the price of XYZ common stock will be $150. If the economy is not in a recession one year from now the price of XYZ common stock will be $200. If the current price of XYZ stock is $175, what is the standard deviation of the returns of XYZ common stock over the next year? Enter your answer as a percent without the “%”. Round your final answer to two decimals.
Investors expect a company to announce a 9 percent decrease in earnings, but instead the company announces a 1 percent decrease. If the market is semistrong-form efficient, which of the following should happen? a. The stock’s price rises because the earnings decrease was less than expected. b. The stock’s price stays the same because earnings announcements have no effect if the market is semistrong-form efficient. c. The stock’s price decreases slightly because the company had a slight decrease in earnings.

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS