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

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Similar questions

A stock is expected to return 8% in a normal economy, 12% if the economy booms, and lose 6% if the economy moves into a recessionary period. Economists predict a 56% chance of a normal economy, a 24% chance of a boom, and a 20% chance of a recession. The expected return on the stock is %.
Suppose a stock pays a dividend of $3 per share each year, and you don’t expect that dividend to change. Using the zero-growth model answer the following: (a) If you want a 10% return on your investment, how much should you be willing to pay for the stock? (b) The Fed cut the interest rate by 2%, causing the required investment return drop to 8%. What’s the value of a share of stock?
A firm recently paid a dividend of $2.05 per share, but analysts expect the dividend to decrease by 6% per year. The risk free rate is 1.5% and the market risk premium is 7%. If its beta is 2.25 and the market is in equilibrium what is the value of the stock? (explain your answer) $19.32 $8.82 $11.17 $8.29
2. Suppose that the consensus forecast of security analysts of NoWork Inc. is that earnings next year will be E1 = $10.00 per share. The company tends to plow back 50% of its earnings and pay the rest as dividends. The CFO estimates that the company’s growth rate will be 8% from now on. (a) Suppose there is uncertainty about the stock’s dividend growth rate. With a probability1/3 the growth rate will be 10%, with a probability 2/3 it will be 7%. What are the respective market values under the two different growth rates? (b) What is the fair price of the stock given the probabilities above? (c) What is the expected growth rate for the stock? Given your calculations, which security is more valuable for an investor: the stock with an 8% growth rate for sure or the stock described in part (a) with an uncertain growth rate?
According to equity analysts at Goldman Sachs, over the next year, there is a 13% chance of an economic boom and a 75% likelihood of a normal economy. You just bought shares of Time Warner (ticker symbol: TWX) that are expected to earn 14% in a booming economy and 8% in a normal economy. What is Time Warner’s expected return if the company is expected to lose 4% in a recessionary economy? a. 7.69 b. 7.34 c. 6.43 d. 4.00 e. 8.30
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.
On December 31,2019, Microsoft paid an annual dividend per share of $5. Today is January 1st, 2020. The dividend is expected to grow by 2% per year for the next four years and by 1% afterwards in perpetuity. The risk free rate is 6% and the market risk premium is 6%. Microsoft has a beta of 1.3 what should be the stock price of Microsoft on January 1st 2020 based on these dividend forecasts?
The stock of Business Adventures sells for $40 a share. Its likely dividend payout and end-of-year price depend on the state of the economy by the end of the year as follows: Boom Normal economy Recession Expected return Standard deviation Dividend $ 2.80 1.80 0.90 Required: a. Calculate the expected holding-period return and standard deviation of the holding-period return. All three scenarios are equally likely. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Expected return Standard deviation Stock Price $ 48 43 34 b. Calculate the expected return and standard deviation of a portfolio invested half in Business Adventures and half in Treasury bills. The return on bills is 5%. (Do not round intermediate calculations. Round your answers to 2 decimal places.) % %
You are trying to value the stocks of Imaginary Inc. The company is currently involved ina very risky, but potentially very profitable project. In the preceding year, the companyhad earnings of $10 per share. You expect the earnings per share to grow to $15, $20, and$25 in the next three years, after which you expect a growth rate of 2%. The companyalways applies a plowback ratio of 60%. You estimate that a risk-adjusted discount rateof 10% is appropriate.a). What are the expected dividends per share in the next three years?b). What is the expected price per share three years from now?c). What is the fair stock price per share today?
About market efficiency, which of the following statements is right:a. In a highly efficient stock market, it is almost impossible for an investor to make profit from the stock market.b. In a highly efficient stock market, some smart investors can definitely beat the market even without the inside information. c. An investor can make profit by buying the stock of free Inc. since it just reported that the half-year profit doubled with respect to that during the same period in the last year. d. The stock prices of big companies are closer to their intrinsic values than those of small companies since more people follow those big companies, whereas few people follow those small companies.

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