ART Has Come Out with a New and Improved Product

question 50

Multiple Choice

ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of 0.20. Its earnings this year will be $3 per share. Investors expect a 12% rate of return on the shares. At what P/E ratio would you expect ART to sell?

• A)8.33
• B)11.43
• C)14.29
• D)15.25

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Definitions:

Interest Expense

The financial obligation incurred from borrowing money over a set time frame.

Straight-Line Amortization

Straight-line amortization is a method of gradually reducing the cost of an intangible asset over its useful life in equal annual amounts.

Carrying Value

The book value of an asset on a company's balance sheet, calculated as the original cost minus accumulated depreciation and impairment charges.

Interest Paid

The cost incurred for borrowing money, typically expressed as a percentage of the principal loan amount.