Question

8. Jensen Shipping pays no dividend and had earnings per share (EPS) of $5.29 last year. Investors require (and expect) a rate of return of 4.3 percent per year on Jensen’s stock. Other stocks with risk and growth prospects similar to Jensen have an average P/E ratio of 19.5 (i.e., their current price is 19.5 times their EPS). What is the expected share price for Jensen Shipping 4 years from now?    A. $127.32 B. $131.15 C. $138.47 D. $122.08 E. $109.42

9. Collateral

1. Gives a lender a first claim on a specified asset of the borrower in case of default
2. Lowers the interest rate required by lenders
3. Exists in any secured debt (and is specified in the loan contract or indenture)
4. All of the above
5. Always exists on unsecured debts

Answer 1

8.

EPS4 = 5.29(1.043)4 = $6.26

PE Ratio = 19.50

Price of Stock = 19.50(6.26)

Price of Stock = $122.08

9.

Option C is correct

Exists in any secured debt