A FIRM'S NEXT YEAR EARNINGS ARE EXPECTED TO BE $4.00 PER SHARE, AN...

28. A firm's next year earnings are expected to be $4.00 per share, and the firm follows a practice of paying out 60 percent of earnings as dividends. The long-term growth rate for this firm is 5 percent and the appropriate discount rate is 12 percent. What is the price of this stock? A. $10.25 B. $20.45 C. $30.00 * D. $34.29 E. $30.25 Solution: Solve Equation (19-2) for the market price of equity: Because the dividend per share is $2.40 ($4.00 x 0.60), market price of the stock = $2.4/(0.12 - 0.05) = $34.29. CHAPTER 21 CORPORATE GROWTH THROUGH MULTINATIONAL OPERATIONS T 1. The efficient allocation of funds and the acquisition of funds on favorable terms are basically the same for both domestic and multinational companies. T 2. The so-called "theory of comparative advantage" explains why countries exchange their goods and services with each other. F 3. The product life cycle theory and the portfolio theory are the two theories advanced to justify international trade. T 4. Some private companies invest abroad to seek raw materials, to seek new markets, or to seek new knowledge. T 5. The two basic types of risks involved in direct foreign investments are political risks and foreign exchange risks. F 6. In order to minimize political risks, multinational firms must try to maintain technological inferiority over local companies. F 7. Those dollar-denominated deposits in foreign branches of a U.S. bank are not treated as Eurodollars. T 8. Multinational companies can reduce their foreign exchange risk by hedging in the forward exchange market. F 9. The Export-Import Bank was established before the 1930's Great Depression. T 10. Tariffs and import quotas are the two primary means of protectionism. T 11. Oligopoly exists where there are only a few firms whose products are usually close substitutes for one another. T 12. Planned divestment within the context of foreign investment provides for the sale of majority ownership in foreign affiliates to local nationals during a previously agreed upon period of time. T 13. The absolute version of the purchasing power parity doctrine states that the equilibrium exchange rate between domestic and foreign currencies equals the rate between domestic and foreign prices. CHAPTER 21 CORPORATE GROWTH THROUGH MULTINATIONAL OPERATIONS