ART Has Come Out with a New and Improved Product

question 38

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 stock.
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:

Variance

A measure of the variability of scores about a mean; the mean of the sum of squared deviations of scores from the group mean.

Regression Equation

A mathematical representation of the relationship between a dependent variable and one or more independent variables.

Constant

A value that does not change in mathematical expressions or scientific experiments, contrasted with variables which can vary.

Slope

A measure of the steepness or incline of a line, representing the rate of change of a variable.