Assume That a Firm Distributes All of Its Earnings as Dividends

question 37

Multiple Choice

Assume that a firm distributes all of its earnings as dividends. Which of the following is indicated by a price-earnings (P/E) ratio of 10?

• A)It would take 10 years for an investor to recover his or her initial investment.
• B)The firm will pay a dividend of $10 per share.
• C)The value of the stock will be 10 times the initial investment at the time of maturity.
• D)The stock's value will increase by 10 percent every year.
• E)An investor would receive 10 percent of the total earnings of the firm at the time of liquidation.

---

Definitions:

Resale Price Maintenance

A practice where a manufacturer and its distributors agree on the selling prices of the products to end customers.

Predatory Pricing

A strategy whereby a dominant company temporarily reduces prices to a level that is unprofitable for competitors in order to drive them out of the market.

Tying

A sales strategy where a seller requires buyers to purchase a secondary product or service together with the primary product.

Output Effect

The change in total revenue resulting from a change in quantity sold, holding price constant.