A Company's Shares Trade at a P/E Ratio of 10

question 29

Multiple Choice

A company's shares trade at a P/E ratio of 10 and have a consistent growth in earnings of 4.5%. The company has a 30% payout ratio and dividends are paid at the end of each year. In December the company declared its dividend based on an EPS of $6.50. When the markets opened in January and investor purchased 100 shares. The investor's marginal tax rate is 42%. The dividend tax rate is 36%. Capital gains tax applies. If the entire investment is sold at the end of the year and the investor requires a 10% return, what is the after-tax net present value of her investment?

• A) $113.46
• B) $251.52
• C) $328.63
• D) $361.00
• E) $397.64

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Definitions:

Cash Dividends

Payments made by a corporation to its shareholder members, distributing a portion of the company's earnings.

Operating Activities

Business actions directly related to the production, sales, and delivery of a company’s products or services, reflecting its core operations.

Indirect Method

typically pertains to the calculation of cash flows in a financial statement, where net income is adjusted for changes in balance sheet accounts to reflect cash transactions.

Accrued Liabilities

Liabilities that have been incurred but not yet paid or recorded in the financial statements.