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:

Current Sales

The total recorded sales of a company within the current financial period.

Sustainable Growth Rate

The maximum rate at which a company can grow its sales, earnings, and dividends without increasing its leverage or equity.

Dividend Payout Ratio

The fraction of net earnings a firm pays out to its shareholders in dividends, indicating how much money a company returns to shareholders versus reinvesting.

Financial Statement

An official documentation detailing the fiscal transactions and status of a company, individual, or another entity.