Martell Ltd Is Expected to Generate an EPS Next Year

question 14

Multiple Choice

Martell Ltd is expected to generate an EPS next year of $0.80 and its shares are currently priced in the marketplace at $13.11.Lannister Ltd is expected to generate an EPS next year of $0.51 and its shares are currently priced in the marketplace at $9.20.Baratheon Ltd is expected to generate an EPS next year of $0.23 and its shares are currently priced in the marketplace at $5.61.Stark Ltd is expected to generate an EPS next year of $0.56 and its shares are currently priced in the marketplace at $8.85.These companies all operate in the same industry,are expected to all have the same growth prospects and all have the same risk.The industry P/E prospective ratio is known to be 17x.Based upon the P/E ratios,which of the following would be the best investment strategy?

• A)Buy Lannister and Baratheon shares and sell Stark and Martell shares.
• B)Sell Lannister and Baratheon shares and buy Stark and Martell shares.
• C)Sell Martell and Lannister shares and buy Stark and Baratheon shares.
• D)Buy Martell and Lannister shares and sell Stark and Baratheon shares.

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Definitions:

WACC

Weighted Average Cost of Capital; a formula used to calculate a business's cost of capital, where every type of capital is weighted according to its proportion.

Yield-to-Maturity

The total return anticipated on a bond if the bond is held until its maturity date, expressed as an annual rate.

Tax Rate

The percentage defining how much of a person's or business's income is allocated to taxes.

Bond Issues

Financial securities issued by corporations or governments to raise capital by borrowing from investors, to be repaid with interest at maturity.