A Firm Is Expected to Produce Earnings Next Year of $3

question 78

Multiple Choice

A firm is expected to produce earnings next year of $3 per share. It plans to reinvest 25% of its earnings at 20%. If the cost of equity is 11%, what should be the value of the stock?

• A) $27.27
• B) $37.50
• C) $66.67
• D) $70

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Definitions:

Rationalize Denominator

The process of eliminating radicals or complex numbers from the denominator of an algebraic fraction by multiplying both the numerator and the denominator by a suitable value.

Cube Root

The value that when multiplied by itself three times gives the original number.

Square Root

The original number that is obtained by squaring a certain value.

Number Approach

A strategy or method that emphasizes the use of numbers and quantitative data to solve problems or make decisions.