Question: Assume a company s price to earnings ratio varies randomly in the band
Assume a company’s price-to-earnings ratio varies randomly in the band of values between 12 and 18 over time. For simplicity, assume its earnings are stable for the next 10 years and no dividends are paid. What is the bandwidth for the company’s future annualized TRS over a horizon of 1 year and 10 years?
Answer to relevant QuestionsIn many companies executive compensation is linked to the company’s annual TRS (or margin of TRS above its peers). Discuss pros and cons of using TRS as a basis for executive compensation. If a company’s value is not driven by its short-term earnings, why do investors spend so much time analyzing a company’s annual or even quarterly earnings announcements? In which of the following markets would you expect market mispricing to be more likely or less likely to occur: the market for equity stocks, fine arts, foreign currency, securitized debt obligations, or copper? Give reasons ...Would a company’s share price benefit from having fewer traders and more fundamental investors among the company’s shareholders? What are some impediments to matching the best potential owner to a business?
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