At the beginning of this chapter you read about a 2015 earnings announcement from HP in which earnings per share were reported as $1.85 for the quarter. Let's make a simple assumption and say that earnings for the year were four times as much, or $7.40 per share. At the time of that announcement, the average P/E for stocks in the U.S. was close to 15.

a. If you use the market's P/E and HP's current earnings to estimate the stock's intrinsic value, what value do you obtain?

b. The actual price of HP after the earnings announcement was about $73. What does this tell you about your answer to part a?

c. Suppose HP paid out all of its earnings as a dividend. Suppose also that investors expected the firm to continue doing that forever, and because the company was not reinvesting any earnings, investors expected no growth in dividends. If the required return on HP stock is 9%, what is the stock price?

d. Comment on your answer to part c in light of HP's market price at the time.