Consider a corporation that is earning $3 per share and pays dividends of $1 per share. The interest rate on government bonds is 8 percent and the inflation rate has been 3 percent per year for the past 20 years. There are 100,000 shares outstanding, representing the entire ownership of the firm (which has no debt outstanding). Shares in the firm have traditionally yielded a one-percent risk premium over government bonds. If real earnings, interest rates, and inflation rates are not expected to change, the value of the firm would be approximately
1. $1.67 million.
2. $5 million.
3. $3.33 million.
4. $1.1 million.
Choose the correct option.