The correct answer is: A. Earnings per share
Walter’s model is a dividend discount model that is used to estimate the value of a stock. The model assumes that the value of a stock is equal to the present value of its future dividends. The model can be written as follows:
$P_0 = \frac{D_1}{r – g}$
where:
- $P_0$ is the current price of the stock
- $D_1$ is the dividend that the company is expected to pay in the next year
- $r$ is the required rate of return
- $g$ is the growth rate of dividends
If $ke = r$, then the required rate of return is equal to the growth rate of dividends. This means that the value of the stock is equal to the present value of its future dividends, which are growing at a constant rate. In this case, earnings per share are irrelevant because they do not affect the value of the stock.
Earnings per share (EPS) is a measure of a company’s profitability. It is calculated by dividing a company’s net income by the number of shares outstanding. EPS is often used as a measure of a company’s performance and as a benchmark for comparing companies in the same industry.
However, EPS is not always a reliable measure of a company’s value. This is because EPS can be manipulated by companies through accounting practices. For example, a company can increase its EPS by buying back shares, which reduces the number of shares outstanding. This can make EPS look higher than it actually is.
In addition, EPS does not take into account a company’s debt load or its capital structure. A company with a lot of debt may have a high EPS, but it may also be a risky investment.
For these reasons, EPS is not always a reliable measure of a company’s value. In the case of Walter’s model, EPS is irrelevant because the model assumes that the value of a stock is equal to the present value of its future dividends, which are growing at a constant rate.