1. ART company has come out with a new and improved product. As a result, the ma

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Question

ART company has come out with a new and improved product. As a result, the market projects an ROE of 25% for the company, and we know the company will maintain a plowback ratio of 0.20. The company's earnings this year is $3 per share and the current market price is $35. If firms with similar risks in the industry have a PE ratio of 20 with an estimated earnings growth rate of 12%, is ART company overvalued or undervalued based on PEG approach?

The ART company is undervalued because it has a PE ratio that equals to 11.11

The ART company is overvalued because it has a PEG ratio that equals to 1.42

The ART company is overvalued because it has a PEG ratio that equals to 2.22

The ART company is undervalued because it has a PEG ratio that equals to 1.42

The ART company is overvalued because it has a PE ratio that equals to 22.15

The ART company is undervalued because it has a PEG ratio that equals to 2.22

2. A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 5%, and if investors require a 11% rate of return, what is the price of the stock?

3. The EBIT of a firm is $248, the tax rate is 40%, the depreciation is $66, capital expenditures are $35 and the increase in net working capital is $36. What is the free cash flow to the firm?

4 .A company has a profit margin of 10%, an asset turnover ratio of 1.6, and an equity multiplier ratio of 1.65, both the tax burden and the interest burden are at 1, if the profit margin increases to 18% but the asset turnover ratio decreases to 0.8, what will be company’s new ROE? Put answers in decimal places instead of percentage.