Suppose you are considering making an equity investment in AMR Inc. a company that builds shipping containers. AMR is expected to have earnings of 8.00 per share and dividends of 4.00 per share next year. Dividends are expected to grow at 3% in the future. Companies similar to AMR have expected returns of 9%. Other, more risky, companies have expected returns of 12%. Real estate investments have expected returns of 5%.
- Would you be willing to pay $69.00 for a share of AMR? Why or Why not?
- Suppose the price of AMR is currently $66.67. Your friend argues that the AMR is a 'terrible buy' because other companies in the market have 'higher expected growth'. Do you agree? Why or Why not?
- Suppose again that the market price of AMR is $66.67. What is AMR's P/E Ratio?