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The price earnings ratio (PE) is a measure of how much the market is willing to pay for $1 of
____ from a firm.
A) earnings
B) dividends
C) assets
D) stock
Answer: A
Diff: 1 Type: MC Page Ref: 141
Skill: Recall
Objective List: 7.1 Illustrate how stocks are valued as the present value of dividends
What is the current price of a telecommunication company's stock if earnings per share are
projected to be $1.50 per share and the industry's average PE ratio is $30?
A) $45
B) $20
C) $31.50
D) $28.50
Answer: A
Diff: 2 Type: MC Page Ref: 141
Skill: Applied
Objective List: 7.1 Illustrate how stocks are valued as the present value of dividends
What is the current price of a telecommunication company's stock if earnings per share are
projected to be $2.00 per share and the industry's average PE ratio is $20?
A) $40
B) $10
C) $22
D) $18
Answer: A
Diff: 2 Type: MC Page Ref: 141
Skill: Applied
Objective List: 7.1 Illustrate how stocks are valued as the present value of dividends
You believe that a corporation's dividends will grow 5 percent on average into the
foreseeable future. If the company's last dividend payment was $5 what should be the current
price of the stock assuming a 12 percent required return?
Answer: Use the Gordon Growth Model.
$5(1 + .05)/(. 12 - .05) = $75
Diff: 3 Type: SA Page Ref: 140
Skill: Applied
Objective List: 7.1 Illustrate how stocks are valued as the present value of dividends