Which of the following are limitations to the price-earnings model? Check all that apply.It can result in inaccurate valuations when investors rely on an industry price-earnings ratio that uses a collection of firms that is toonarrow, when additional competitors could have also been used.The required rate of return by investors is incorrectly estimated.It assumes that the dividend growth rate will never be lower than the required rate of return.It can result in inaccurate valuations when investors rely on an industry price-earnings ratio that uses a collection of firms that is too:broad, when a smaller, more representative collection of firms could have been used. Suppose that SolarHeat Co., a renewable energy startup, currently has earnings of $10 per share and that Eleanor anticipates the earnings per shareto grow by 6 percent per year. Using a mean industry PE ratio of 12 and the expected annual growth rate on the firm's existing earnings, theestimated stock price in three years is:$138.63$142.92O $147.21$154.35Suppose SolarHeat Co. is expected to pay a dividend of $3 per share over the next three years, that Eleanor's required rate of return is 16 percent,and that she plans to sell the stock at the end of the three-year time period. Under these circumstances, using the adjusted dividend discount model,the value of the stock today is:O $88.47 per share$98.30 per share$101.25 per share$105.18 per share

The price-earnings (P/E) model, additionally regarded as the price-to-earnings ratio, is a monetary…

to grow by 6 percent per year. Using a mean industry PE ratio of 12 and the expected annual growth rate on the firm's existing earnings, the estimated stock price in three years is: $138.63 $142.92 $147.21 $154.35 Suppose SolarHeat Co. is expected to pay a dividend of $3 per share over the next three years, that Eleanor's required rate of return is 16 percent, and that she plans to sell the stock at the end of the three-year time period. Under these circumstances, using the adjusted dividend discount model, the value of the stock today is: $88.47 per share O $98.30 per share $101.25 per share $105.18 per share

to grow by 6 percent per year. Using a mean industry PE ratio of 12 and the expected annual growth rate on the firm's existing earnings, the estimated stock price in three years is: $138.63 $142.92 $147.21 $154.35 Suppose SolarHeat Co. is expected to pay a dividend of $3 per share over the next three years, that Eleanor's required rate of return is 16 percent, and that she plans to sell the stock at the end of the three-year time period. Under these circumstances, using the adjusted dividend discount model, the value of the stock today is: $88.47 per share O $98.30 per share $101.25 per share $105.18 per share

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Which of the following are limitations to the price-earnings model? Check all that apply.
It can result in inaccurate valuations when investors rely on an industry price-earnings ratio that uses a collection of firms that is too
narrow, when additional competitors could have also been used.
The required rate of return by investors is incorrectly estimated.
It assumes that the dividend growth rate will never be lower than the required rate of return.
It can result in inaccurate valuations when investors rely on an industry price-earnings ratio that uses a collection of firms that is too:
broad, when a smaller, more representative collection of firms could have been used.

Suppose that SolarHeat Co., a renewable energy startup, currently has earnings of $10 per share and that Eleanor anticipates the earnings per share
to grow by 6 percent per year. Using a mean industry PE ratio of 12 and the expected annual growth rate on the firm's existing earnings, the
estimated stock price in three years is:
$138.63
$142.92
O $147.21
$154.35
Suppose SolarHeat Co. is expected to pay a dividend of $3 per share over the next three years, that Eleanor's required rate of return is 16 percent,
and that she plans to sell the stock at the end of the three-year time period. Under these circumstances, using the adjusted dividend discount model,
the value of the stock today is:
O $88.47 per share
$98.30 per share
$101.25 per share
$105.18 per share

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