Study Session 14 Equity Investments:
Industry and Company Analysis
56. An Introduction to Security Valuation
(一)强化习题
1. An analyst gathered the following information about a
company's common stock:
The value of a share of the company's common stock is closest to:
A.
. B.
. C.
.
2. An analyst gathered the following information about four
common stock that all have the same dividend payout ratio:
Stock
Required Rate of
Dividend Growth
Return
Rate
1
16.4%
7.1%
2
14.1%
9.2%
3
15.3%
4.4%
4
19.1%
8.0%
The lowest earnings multiplier (price earnings ratio) would most
likely be associated with stock:
A. 2. B. 3. C. 4.
3. An analyst gathered the following information about a common
stock:
Annual dividend per share
$2.10
Risk-free rate of return
7%
Risk premium for the stock
45
If the stock's annual dividend is expected to remain at $2.10,
the value of the stock is closest to :
A. $19.09. B. $20.00. C. $32.40.
4. An analyst gathered the following information about a company:
Net profit margin
4%
Shareholders' equity
$1000000
Dividend payout ratio
33%
Total assets
$2500000
Net income
$180000
The company's potential (sustainable) growth rate is closest to:
A. 2.6%. B. 7.0%. C. 12.0%.
5. All else equal, will a decrease in the expected rate of
inflation result in a decrease in the:
Real risk-free of return Nominal risk-free rate of return
①A. Yes No
②B. Yes Yes
③C. No Yes
A. ①B. ②C. ③
6. An analyst gathered the following annual data for SMG
Corporation on 2004:
Net profit margin
5%
Total asset turnover
2.0%
Total assets to equity
2.5%
Net income
$25000000
Dividends paid on common stock
$10000000
The SMG Corporation's estimated dividend growth rate is closest
to:
A. 10.0%. B. 15.0%. C. 20.0%.
7. Assuming that the risk-free rate is 5 percent, the expected
return on the market is 10 percent, and the stock's beta is 0.5, what
is the value of a stock that paid a $ 0. 30 dividend last year, if
dividends are expected to grow at a rate of 6 percent forever?
A. $15.00. B. $16.63. C. $21.20.
8. An analyst has calculated the following ratios for a firm:
Sales/Total Assets: 2.8
Net Profit Margin (%): 4
Return on Total Assets (%): 11.2
Total Asset/Equity: 1.6
The return on equity for this firm would be closest to:
A. 4.48%. B. 6.40%. C. 17.92%.
9. Study the following information about a stock, calculate the
price earning ratio:
Required rate of return: 15%
Constant growth rate: 8%
A return on equity: 12%
The earning retention ratio: 20%
A. 3.8. B. 4.7. C. 5.6.
10. Study the following information, calculate the expected rate
of return.
index is now selling at $490.
market index multiplier is expected to be 5X.
index earnings is expected to be $100.
dividend payment is expected to be $40.
A. 10%. B. 20%. C. 30%.
11. An analyst gathered the following information about a company:
The stock is currently selling for
per share. Which of the
following best characterizes the:
Intrinsic value of the stock type of stock
①A.
Cyclical
②B.
Speculative
③C.
Speculative
A. ①B. ②C. ③
12. The preferred stock of the Delco Investments Company has a
par value of $150 and a dividend of $11.50. A shareholder's required
return on this stock is 14%. What is the maximum price he would pay?
A. $82.14. B. $150.00. C. $54.76.
13. Which of the following statements concerning security
valuation is FALSE?
A. An investor may determine the required rate of return for the
dividend discount model (DDM) by adding a risk premium to the nominal
risk-free rate.
B. In the dividend discount model (DDM), the value of the firm is
the present value of all future dividends.
C. An investor can estimate the growth rate for the dividend
discount model (DDM) by multiplying the firm's return on equity (ROE)
by the firm's dividend payout ratio.
14. The following data pertains to an investor's stock:
The stock will pay no dividends for two years.
The dividend three years from now is expected to be $1.
Dividends are expected to grow at a 7% rate from that point
onward.
If the investor requires a 17 percent return on their investments,
how much will the investor be willing to pay for this stock now?
A. $6.24. B. $7.31. C. $8.26.
15. Billie Blake is interested in a stock that has an expected
dividend one year from today of $1.50, i. e. , D1=$1.50, D2=$1.75 and
D3=$2.05. She expects to sell the stock for $47.50 at the end of year
3. What is Billie willing to pay one year from today if investors
require a 12 percent return on the stock.
A. $38.01. B. $41.06. C. $52.30.
16. Using the one-year holding period and multiple-year holding
period dividend discount model (DDM), calculate the change in value
of the stock of Monster Burger Place under the following scenarios.
First, assume that an investor holds the stock for only one year.
Second, assume that the investor intends to hold the stock for two
years. Information on the stock is as follows:
Last year's dividend was $2.50 per share.
Dividends are projected to grow at a rate of 10.0% for each of
the next two years.
Estimated stock price at the end of year 1 is $25 and at the end
of year 2 is $30.
Nominal risk-free rate is 4.5%.
The required market return is 10.0%.
Beta is estimated at 1.0.
The value of the stock if held for one year and the value if held
for two years are:
Year one Year two
①A. $25.22 $35.25
②B. $27.50 $35.25
③C. $25.22 $29.80
A. ①B. ②C. ③
17. Which of the following statements regarding a country risk
premium is TRUE?
A. Country risk arises from expected economic and political
events.
B. Firms in different countries assume significantly different
financial risk.
C. Exchange rate risk is relatively small and can be ignored.
18. The risk-free rate is 5 percent, the market rate is 12
percent, and the beta of a stock is 0.5, what would happen to the
required rate of return if the inflation premium increased by 2
percent? It would:
A. increase to 15. B. decrease to 8.5. C. increase to 10.5.
19. Which of the following statements concerning security
valuation is FALSE?
A. Determining the value of a company with supernormal growth
requires finding the present value of the dividends during the
supernormal growth and adding that to the present value of the stock
computed for the period of normal growth.
B. The top-down valuation approach requires an assessment of
industry influences on the company's value first, then stock-specific
influences.
C. A firm with a 20% return on equity (ROE) and a dividend payout
ratio of 30% will have a sustainable growth rate of 14%.
20. An analyst gathered the following information about a common
stock:
Annual dividend per share $2.10
Risk free rate 7%
Risk premium for this stock 4%
If the annual dividend is expected to remain at $2.10, the value
of the stock is closest to:
A. $19.09. B. $30.00. C. $52.50.
21. Assume that the expected dividend growth rate (g) for a firm
decreased from 5% to zero. Further, assume that the firm's cost of
equity (k) and dividend payout ratio will maintain their historic
levels. The firm's P/E ratio will most likely:
A. become undefined. B. increase. C. decrease.
22. The top-down approach of security analysis includes:
A. industry analysis.
B. All of these choices are correct.
C. economic analysis.
23. Which of the following would be assessed first in a top-down
valuation approach?
A. Fiscal policy.
B. Industry return on equity (ROE).
C. Company return on equity (ROE).
24. Assume a company's ROE is 14% and the required return on
equity is 13%. All else remaining equal, if there is a decrease in a
firm's retention rate, a stock's value as estimated by the constant
growth dividend discount model (DDM) will most likely:
A. increase. B. decrease. C. not change.
25. Deciding how to allocate investment funds, first among
countries, and then within countries to various asset classes, is the
objective of which step of the top-down valuation approach?
A. Analysis of industry influences.
B. Company analysis.
C. Analysis of general economic influences.
26. In the top-down approach to valuation, industry analysis
should be conducted before company analysis because:
A. most valuation models recommend the use of industry-wide
average required returns, rather than individual returns.
B. the goal of the top-down approach is to identify those
companies in non-cyclical industries with the lowest P/E ratios.
C. an industry's prospects within the global business environment
are a major determinant of how well individual firms in the industry
perform.
27. Study the following data, calculate the return on equity for
2007 and 2008.
2007
2008
Pre-interest profit margin
0.3
0.15
(EBIT/S)
Asset turnover (S/A)
2
2
Leverage multiplier (A/E)
2
2
Tax retention rate (1-t)
0.8
0.8
Interest expense ratio (I/A)
0.06
0.06
2007 2008
①A. 0.864 0.384
②B. 0.673 0.271
③C. 0.384 0.864
A. ①B. ②C. ③
28. Which of the following would NOT be a reason for market,
industry, and company analysis?
A. Firms within a given industry perform differently.
B. The market is generally a very important component of security
returns.
C. Single industries perform consistently over time.
29. Which of the following statements concerning security
valuation is FALSE?
A. The liquidity risk of countries refers to the size and
activity of the country's capital markets.
B. ROA times one minus the dividend payout ratio is the firm's
sustainable growth rate.
C. If the firm's payout ratio is 40% , has a required return of
12% , and a dividend growth rate of 7%, the firm's price to earnings
(P/E) ratio should be 8.
30. A stock, which currently does not pay a dividend, is expected
to pay its first dividend of $1.00 in five years (D5=$1.00).
Thereafter, the dividend is expected to grow at an annual rate of 25
percent for the next three years and then grow at a constant rate of
5 percent per year thereafter.
The required rate of return is 10. 3 percent. What is the value
of the stock today?
A. $20.65. B. $20.95. C. $22.72.
31. A firm is expected to have four years of growth with a
retention ratio of 100 percent. Afterwards the firm's dividends are
expected to grow 4 percent annually, and the dividend payout ratio
will be set at 50 percent. If earnings per share (EPS)=$2.4 in year 5
and the required return on equity is 10 percent, what is the stock's
value today?
A. $20.00. B. $30.00. C. $13.66.
32. A firm has an expected dividend payout ratio of 48 percent
and an expected future growth rate of 8 percent. What should the
firm's price to earnings ratio (P/E) be if the required rate of
return on stocks of this type is 14 percent and what is the retention
ratio of the firm?
P/E ratio Retention ratio
①A. 6.5 48%
②B. 8.0 52%
③C. 8.0 48%
A. ①B. ②C. ③
33. Baker Computer earned $6.00 per share last year, has a
retention ratio of 55 percent, and a return on equity (ROE) of 20
percent. Assuming their required rate of return is 15 percent, how
much would an investor pay for Baker on the basis of the earnings
multiplier model?
A. $173.90.
B. Need growth rate to complete calculation.
C. $74.93.
34. A company reported its latest annual report as following:
Net income = $1000000
Total equity = $5000000
Total assets = $10000000
Dividend payout ratio =40%
Based on the sustainable growth model, the most likely forecast
of the company's future earnings growth rate is:
A. 12%. B. 8%. C. 4%.
35. Which of the following is NOT an assumption of the constant
growth dividend discount model (DDM)?
A. The growth rate of the firm is higher than the overall growth
rate of the economy.
B. ROE is constant.
C. Dividend payout is constant.
36. Which of the following statements about the constant growth
dividend discount model (DDM) in its application to investment
analysis is FALSE? The model:
A. is best applied to young, rapidly growing firms.
B. can't be applied when g > K.
C. can't handle firms with variable dividend growth.
37. Use the following information and the dividend discount model
to find the value of GoFlower, Inc. 's, common stock?
Last year's dividend was $ 3.10 per share.
The growth rate in dividends is estimated to be 10 percent
forever.
The return on the market is expected to be 12 percent.
The risk-free rate is 4 percent.
Go Flower's beta is 1.1.
A. $121.79. B. $34.95. C. $26.64.
38. An analyst gathered the following information about a company:
Net profit margin 5.0%
Total asset turnover 2.0
Total assets/equity 2.5
Beta for the company's stock 1.5
Expected rate of return on the market index 10.0%
Risk-free rate of return 5.0%
The analyst expects the information above to accurately reflect
the future. If the company wants to achieve a growth rate of at least
15% without changing its capital structure or issuing new equity, the
maximum dividend payout ratio for the company would be closest to:
A. 0.0%. B. 12.5%. C. 40.0%.
39. Given the following estimated financial results, value the
stock of Fish Chips, Inc. , using the infinite period dividend
discount model (DDM).
Sales of $1000000
Earnings of $150000
Total assets of $800000
Equity of $400000
Dividend payout ratio of 60.0%
Average shares outstanding of 75000
Real risk free interest rate of 4.0%
Expected inflation rate of 3.0%
Expected market return of 13.0%
Stock Beta at 2.1
The per share value of Fish Chips stock is approximately: (Note:
Carry calculations out to at least 3 decimal places. )
A. $17.91. B. $26.86. C. -$26.39.
40. Which of the following is NOT a risk factor for a country's
risk premium?
A. Business risk. B. Financial risk. C. Technology risk.
41. Which of the following statements concerning security
valuation is least accurate?
A. A stock with a dividend last year of $ 3.25 per share, an
expected dividend growth rate of 3.5%, and a required return of 12.5%
is estimated to be worth $36.11.
B. A stock to be held for two years with a year-end dividend of
$2.20 per share, an estimated
value of $20.00 at the end of two years, and a required return of
15% is estimated to be worth $18.70 currently.
C. A preferred stock with a dividend of $3.00 per share and a
required return of 11.5% is estimated to be worth $ 26.09 currently.
42. By bee is expected to have a temporary supernormal growth
period and then level off to a "normal," sustainable growth rate
forever. The supernormal growth is expected to be 25 percent for 2
years, 20 percent for one year and then level off to a normal growth
rate of 8 percent forever. The market requires a 14 percent return on
the company and the company last paid a $2.00 dividend. What would
the market be willing to pay for the stock today?
A. $52.68. B. $47.09. C. $76.88.
43. Which of the following statements concerning security
valuation is FALSE?
A. Accounting methods may differ substantially between countries.
B. To value any security, you need to know the projected cash
flows, their timing, and the required rate of return.
C. If the return on new investments is less than the return the
firm is earning on its existing investments, the firm is considered a
growth firm.
44. Day and Associates is experiencing a period of abnormal
growth. The last dividend paid by Day was $0.75. Next year, they
anticipate growth in dividends and earnings of 25 percent followed by
negative 5 percent growth in the second year. The company will level
off to a normal growth rate of 8 percent in year three and is
expected to maintain an 8 percent growth rate for the foreseeable
future. Investors require a 12 percent rate of return on Day.
What is the approximate amount that an investor would be willing
to pay today for the two years of abnormal dividends?
A. $1.55. B. $1.83. C. $1.62.
(二)习题答案
1. C.
r=4%+7%=11%
P0=D0×(1+g)/(r-g)=1×(1+0.09)/(0.11-0.09)=54.5
2. C.
The lowest earnings multiplier is associated with higher (r-g).
3. A.
If the dividend is expected to remain constant, the value of the
stock is determined by dividing the amount of the dividend by the
required rate of return for the stock; $2.10/0.11=$19.09.
4. C.
(1-33%)×(180000/1000000)=12.06%.
5. C.
The nominal risk-free rate of return includes both the risk-free
rate of return and the expected rate of inflation. A decrease in
inflation expectations would decrease the nominal risk-free rate of
return, but would have no effect on the real risk-free rate of return.
6. B.
ROE=2.0×0.05×2.5=0.25
b=10000000/25000000=0.40
g=ROE×(1-b)=0.25×(1-0.40)=0.15
7. C.
The discount rate is k =0.05+0.5×(0.10-0.05)=0.075. Use the
infinite period dividend discount model to value the stock. The stock
value =D1/(k-g)=(0.30×1.06)/(0.075-0.06)=$21.20.
8. C.
ROE = Net Profit Margin × Sale/Total Assets × Total
Assets/Equity =4.00×2.80×1.60=17.92%, Alternatively , ROE = Return
on Total Assets × Total Assets/Equity =11.20×1.60=17.92%.
9. C.
P/E = Dividend payout ratio/(k-g)
Dividend payout ratio = 1 - retention ratio = 1-0.2=0.8
P/E =0.8×(0.15-0.08)=5.6
10. A.
Step1: Calculate the ending index value = $100×5=$500
Step2: Calculate the expected return.
E(R1)=[Dividends + (Ending value - Beginning value)]/(Beginning
value)=[40+(500-490)]/490 =0.1 or 10%
11. C.
Implied dividend growth rate = ROE × RR = 20%×0.5=10%
Intrinsic value of the stock:
The stock is overvalued; it is a speculative stock.
12. A.
Value of preferred = D/kp = $11.50/0.14=$82.14.
13. C.
An investor can estimate the growth rate for the DDM by
multiplying the firm's ROE by the retention rate, which is one minus
the firm's dividend payout ratio.
14. B.
Time line=$0 now; $0 in year 1; $0 inyear2; $1 in year 3.
Note that the price is always one year before the dividend date.
Solve for the PV of $10 to be
received in two years. FV=10; N=2; I=17; CPT→PV=$7.31.
15. B.
Find the present values of the cash flows and add them together.
N=1; I/Y=12; FV=1.75; compute PV=1.56.
N=2; I/Y=12; FV=2.05; compute PV=1.63.
N=2; I/Y=12; FV=47.50; compute PV=37.87.
Stock Price=$1.56+$1.63+$37.87=$41.06.
16. C.
ke = Rf+Beta×(Rm-Rf)=4.5%+1×(10.0%-4.5%)=4.5%+5.5%=10.0%.
D1=D0×(1+g)=2.50×1.10=2.75
D2=D1×(1+g)=2.75×1.10=3.03
Use DDM to calculate the present value of the expected stock cash
flows ( assuming the one-year hold ).
P0=[D1/(1+ke)]+[P1/(1+ke)]=[$2.75/1.10]+[$25.0/1.10]=$25.22.
Use the multi-period DDM to calculate the return for the stock if
held for two years.
P0=[D1/(1+k)]+[D2/(1+ke)2+[P2/(1+ke)2=[$2.75/1.10]+[$3.03/1.102+[$30.
0/1.102=$29.80.
17. B.
Country risk arises from unexpected not expected economic and
political events. Exchange rate risk must always be taken into
account.
18. C.
k0=5+0.5×(12-5)=8.5; k1=7+0.5×(14-7)=10.5.
19. B.
The top-down valuation approach requires an assessment of general
economic conditions first, then industry influences on the company's
value, and then stock-specific influences.
20. A.
P=D/(k-g), but here g=0.
k=risk free rate +equity risk premium, so k=7%+4%=11%
P=$2.10/0.11=$19.09
Note D over (k-g) when g=0 is the same as the preferred stock
valuation model.
21. C.
The P/E ratio may be defined as: Payout ratio/(k-g), so if k is
constant and g goes to zero, the P/E will decrease.
22. B.
Economic, industrial, and company analysis, in that order, must
all be accomplished in the top-down approach.
23. A.
In the top-down valuation approach, the investor should analyze
macroeconomic influences first, then industry influences, and then
company influences. Fiscal policy, as part of the macroeconomic
landscape, should be analyzed first.
24. B.
In this case, reduction in earnings retention will likely lower
the P/E ratio. The logic is as follows: Because earnings retention
impacts both the numerator (dividend payout) and denominator (g) of
the P/E ratio, the impact of a change in earnings retention depends
upon the relationship of k and ROE. If the company is earning a
higher rate on new projects than the rate required by the market (ROE
＞ ke), investors will likely prefer that the company retain more
earnings. Since an increase in the dividend payout would decrease
earnings retention, the P/E ratio would fall, as investors will value
the company lower if it retains a lower percentage of earnings.
25. C.
The objective of step one, economic analysis, is to allocate your
portfolio among countries and asset classes based on your analysis of
future economic conditions.
26. C.
In general, an industry's prospects within the global business
environment determine how well or poorly individual firms in the
industry do. Thus, industry analysis should precede company analysis.
The goal is to find the best companies in the most promising
industries; even the best company in a weak industry is not likely to
perform well.
27. A.
ROE=[(S/A)×(EBIT/S)-(I/A)]×(A/EQ)×(1-t)
ROE 2007=(2×0.3-0.06)×2×0.8=0.864
ROE 2008=(2×0.15-0.06)×2×0.8=0.384
Profit margin fell so ROE fell.
28. C.
The second step in the top-down, three-step valuation process is
to identify those industries that will prosper or suffer during the
time frame of your economic forecast. You should consider the
cyclical nature of the industry under study. Some industries are
cyclical, some are contra-cyclical and some are non-cyclical. Finally,
your analysis should also account for foreign economic shifts. In
general, an industry's prospects within the global business
environment determine how well or poorly individual firms in the
industry do. Thus, industry analysis should precede company analysis.
29. B.
One minus the dividend payout ratio is the firm's retention rate.
The sustainable growth rate is the firm's return on equity (ROE)
times the retention rate.
30. A.
This is essentially a two-stage DDM problem. Discounting all
future cash flows, we get:
Note that the constant growth formula can be applied to dividend
8 because it will grow at a constant rate (5%) forever. It is
preferable to do this with the right keystrokes on the calculator but
it is a bit tricky. Since the first non-zero cash flow occurs in year
5, we have to communicate this information to the calculator
correctly to get the indicated solution. Using the CF function the
sequence of keystrokes would be : CF0=0; CF1=0, F1=4; CF2=1.00;
CF3=1.25; CF4=1.5625; CF5=40.6471; I=10.3; CPT NPV=$20.647. When we
input the first dividend as CF2=1.00, we are telling the calculator
that this is really received in the fifth year and it is then
discounted correctly. Note that CF5 is made up of two components-the
dividend that is paid in year 8=1.253=1.93125 plus the present value
of the constantly growing ( at 5% ) perpetuity =
. These must be added since they are
effectively received at the same point in time.
31. C.
Dividend in year 5 = (EPS) ( payout ratio) =2.4×0.5=1.2
P4=1.2/(0.1-0.04)=1.2/0.06=$20
P0=PV/(P4)=$20/(1.10)4=$13.66
32. B.
P/E=(dividend payout ratio)/(k-g)
P/E=0.48/(0.14-0.08)=8
The retention ratio=(1 - dividend payout)=(1-0.48)=52%
33. C.
g=Retention × ROE=0.55×0.2=0.11
P/E=0.45/(0.15-0.11)=11.25
Next year's earnings E1=E0×(1+g)=6.00×1.11=$6.66
Next years dividend (D1)=E1×Payout ratio =$6.66×0.45=$3.00
P=D1/(k-g)=$3.00/(0.15-0.11)=$74.93
34. A.
g=(RR)(ROE)
RR=1 - dividend payout ratio = 1-0.4=0.6
ROE = NI/Total Equity = 1000000/5000000 = 1/5=0.2
Note: This is the "simple" calculation of ROE. Since we are only
given these inputs, these are what you should use. Also, if given
beginning and ending equity balances, use the average in the
denominator, g=0.6×0.2=0.12 or 12%
35. A.
Other assumptions of the DDM are: dividends grow at a constant
rate and the growth rate continues for an infinite period.
36. A.
The model is most appropriately used when the firm is mature,
with a moderate growth rate, paying a constant stream of dividends.
In order for the model to produce a finite result, the company's
growth rate must not exceed the required rate of return.
37. A.
The required return for Go Flower is 0.04+1.1×(0.12-0.04)=0.128
or 12.8%. The expect dividend is $3.10×1.10=$3.41. Go Flower's
common stock is then valued using the infinite period dividend
discount model (DDM) as $3.41/(0.128-0.10)=$121.79.
38. C.
The growth rate for the company is the product of the return on
equity (ROE) and the retention rate. The retention rate is( 1 - the
dividend payout ratio). The ROE for the company is 5.0%×2.0×2.5=25%.
The retention rate must be at least 60% to achieve a growth of at
least
15% (0.60×25%=15%). If the retention rate is at least 60% , the
maximum dividend payout ratio is 40%.
39. B.
DDM formula: P0=D1/(ke-g)
D1=( Earnings × Payout ratio)/average number of shares
outstanding = ($150000×0.60)/75000=$1.20
Nominal risk - free rate=(1+real risk free rate)×(1+expected
inflation)-1=1.04×1.03-1=0.0712, or 7.12%
ke=nominal risk free rate + [ beta × ( expected market return nominal risk free rate ) ]=7.12%+2.1×(13.0%-7.12%)=0.19468
Retention=(1-Payout)=1-0.60=0.40.
ROE = (net income/sales) × (sales/total assets) × (total
assets/equity) =
(150000/1000000)×(1000000/800000)×(800000/400000)=0.375
g=(retention rate × ROE)=0.375×0.40=0.15
calculate: P0=D1/(ke-g)=$1.20/(0.19468-0.15)=26.86.
40. C.
Technology risk is not considered a relevant risk factor in
assessing a country's risk premium.
41. A.
A stock with a dividend last year of $3.25 per share, an expected
dividend growth rate of 3.5%, and a required return of 12.5% is
estimated to be worth $37.33 using the DDM where P0=D1/(k-g). We are
given D0=$3.25, g=3.5%, and k=12.5%. What we need to find is D1 which
equals D0×(1+g) therefore D1=$3.25×1.035=$3.36 thus P0=3.36/(0.1250.035)=$37.33.
42. A.
First, find the future dividends at the supernormal growth
rate(s). Next, use the infinite period dividend discount model to
find the expected price after the supernormal growth period ends.
Third, find the present value of the cash flow stream.
D1=2.00(1.25)=2.50(1.25)=D2=3.125(1.20)=D3=3.75
P2=3.75/(0.14-0.08)=62.50
N=1; I/Y=14; FV=2.50; CPT PV=2.19.
N=2; I/Y=14; FV=3.125; CPT PV=2.40.
N=2; I/Y=14; FV=62.50; CPT PV=48.09.
Now sum the PV's: 2.19+2.40+48.09=$52.68.
43. C.
If the return on new investments is greater than the return the
firm is earning on its existing investments, the firm is considered
to be a growth firm.
44. A.
First find the abnormal dividends and then discount them back to
the present.
$0.75×1.25=$0.9375×0.95=$0.89.
D1=$0.9375; D2=$0.89.
At this point you can use the cash flow keys with CF0=0,
CF1=$0.9375 and CF2=$0.89.
Compute for NPV with I/Y=12. NPV =$1.547.
Alternatively, you can put the dividends in as future values,
solve for present values and add the two together.
57. Industry Analysis
(一)强化习题
1. Technological changes are most likely to result in which of
the following effects? Evolving technology is likely to result in
changes in:
A. educational curriculum only.
B. educational curriculum and the relative demand for various
products.
C. the relative demand for various products only.
2. When the government reallocates spending based upon a decision
to promote new and developing industries, this would be categorized
as:
A. a structural change.
B. monetary policy.
C. a cyclical change.
(二)习题答案
1. B.
If technological changes result in changes in the set of skills
required of workers, this is likely to lead to changes in educational
curriculum (and possibly delivery). Such changes often result in the
production and demand for new or different products.
2. A.
Structural changes include government activity, such as changes
in spending and regulations that are designed to promote or inhibit
specific economic activities.
58. Company Analysis and Stock Valuation
(一)强化习题
1. BIM Technologies Inc. is a large firm in a competitive
industry. The company has above-average investment opportunities and
its return on investments has been above the company's required rate
of return. In addition, BIM has invested heavily in fixed assets and
technology to reduce its production costs. The company has also
increased its advertising budget substantially to establish a strong
brand image for its products. From the above description, BIM is best
characterized as a
A. cyclical company that follows a low-cost strategy.
B. speculative company that follows a differentiation strategy.
C. growth company that follows a defensive competitive strategy.
2. Emanuel Rodriguez, CFO of Monterrey Spikes Sports Goods Inc. ,
has gathered the following information about the company:
2000 2007
Sales $128.4 million 220.0 million
ROA 10% 12%
Net profit margin 6% 7%
Number shares outstanding 5 million 6 million
Rodriguez expects sales in 2008 to grow at the historical
compound annual growth of sales from the year 2000 to 2007. For the
year 2008, the net profit margin and the number of shares outstanding
are expected to remain unchanged from the year 2007. The company's
earnings per share (EPS), for the year 2008, is closest to:
A. $2.74. B. $2.77. C. $4.69.
3. The earnings multiplier model, derived from the dividend
discount model, expresses a stock's P/E ratio (P0/E1) as the:
A. expected dividend in one year divided by the difference
between the required return on equity and the expected dividend
growth rate.
B. expected dividend payout ratio divided by the sum of the
expected dividend growth rate and the required return on equity.
C. expected dividend payout ratio divided by the difference
between the required return on equity and the expected dividend
growth rate.
4. ff the payout ratio increases, the P/E multiple will:
A. increase, if we assume that the growth rate remains constant.
B. always increase.
C. decrease, if we assume that the growth rate remains constant.
5. An analyst has made the following estimates for a stock:
Dividends over the next year 0.60
Long-term growth rate 13%
Intrinsic value $24
The shares are currently priced at $22.
Assuming the stock price moves to intrinsic value over the next
year, what is the expected return on the stock?
A. 9.1%. B. 11.8%. C. 15.7%.
6. An analyst gathered the following information about Weston
Chemical's stock:
Estimated sales per share = $12.19
Earnings before interest, taxes, depreciation, and amortization
(EBITDA) = 73%
Interest expense per share = $2.07
Depreciation expense per share = $6.21
The tax rate =35%
Weston's estimated Earnings per Share (EPS) is closest to?
A. $0.40. B. $2.54. C. $3.11.
7. All else equal, a firm will have a higher Price-to-Earnings
(P/E) multiple if:
A. retention ratio is higher. B. risk-free rate is higher. C. the
stock's beta is lower
8. An analyst gathered the following data for the Parker Corp.
for the year ended December 31, 2008:
EPS2008=$1.75
Dividends2008=$1.40
Betaparker=1.17
Long-term bond rate = 6.75%
Rate of return S&P500=12.00%
The firm has changed its dividend policy and now plans to pay out
60% of its earnings as dividends in the future. If the long-term
growth rate in earnings and dividends is expected to be 5% , the
appropriate price to earnings (P/E) ratio for Parker will be:
A. 7.98. B. 9.14. C. 7.60.
9. Use the following data to analyze a stock's price earnings
ratio (P/E ratio):
The stock's beta is 1.2.
The dividend payout ratio is 60%.
The stock's expected growth rate is 7%.
The risk free rate is 6% and the expected rate of return on the
market is 13%.
Using the dividend discount model, the expected P/E ratio of the
stock is closest to:
A. 8.1. B. 10.0. C. 12.0.
10. Assume the following information for a stock:
Beta coefficient = 1.50
Risk - free rate = 6%
Expected rate of return on market = 14%
Dividend payout ratio = 30%
Expected dividend growth rate = 11%
The estimated earnings multiplier (P/E ratio) is closest to:
A. 10.00. B. 3.33. C. 4.29.
11. A stock has a required rate of return of 15%, a constant
growth rate of 10%, and a dividend payout ratio of 45%. The stock's
price-earnings ratio should be:
A. 3.0 times. B. 9.0 times. C. 4.5 times.
12. All else equal, which of the following would most likely
cause a firm's price-earnings ratio to decline?
A. The level of inflation is expected to decline.
B. The dividend payout ratio increases.
C. The yield on Treasury bills increases.
13. An analyst gathered the following information on Roan
Mountain Amusement Park:
Sales per share = $9.29
Earnings before interest, taxes, depreciation, and amortization
(EBITDA) = 65%
Interest expense per share = $1.26
Depreciation expense per share = $4.12
Marginal tax rate = 43%
Roan Mountain's expected earnings per share is closest to:
A. $0.38. B. $0.22. C. $0.04.
14. Mamford Industries has solid earnings that are projected to
grow steadily into the foreseeable future. Which of the following is
TRUE?
A. Mamford is a growth company.
B. Mamford's stock is considered a growth stock.
C. Mamford is a growth company and its stock is a growth stock.
15. An analyst gathered the following information for a company:
Risk-free rate = 6.75%
Expected market return = 15.00%
Beta = 1.30
Dividend payout ratio = 55%
Profit margin = 10.0%
Total asset turnover = 0.75
Assets to equity ratio = 2.00
What is the firm's sustainable growth rate?
A. Tax rate needed to determine answer.
B. 6.75%.
C. 15.00%.
16. Jack Saunders is analyzing Bareo Incorporated. an industrial
conglomerate company. Saunders is estimating the intrinsic value for
Barco Incorporated by forecasting the company's earnings per share
and earnings multiplier. Each of the following attributes of Bareo
will increase the company's earnings multiplier EXCEPT:
A. Barco Incorporated has never had a restructuring charge in its
history.
B. Barco Incorporated's earnings move in tandem with overall
economic growth.
C. Barco Incorporated consistently generates free cash flow.
17. Estimate an earnings multiplier for ABC Company, assuming a
dividend payout ratio of 50%, a required return of 12% , and a growth
rate of 7%.
A. 10.00. B. 12.00. C. 15.57.
18. A company has a "0" earnings retention rate, the firm's P/E
ratio will equal:
A. 1/k. B. D/P+g. C. k+g.
19. Assuming that a company's ROE is 12% and the required rate of
return is 10%, which of the following would most likely cause the
company's P/E ratio to rise?
A. The inflation rate falls.
B. The firm's dividend payout rises.
C. The firm's ROE falls.
20. Which of the following is NOT a determinant of the expected
price/earnings (P/E) ratio?
A. Expected dividend payout ratio (D/E).
B. Expected growth rate in dividends (g).
C. Average debt to capital ratio (D/C).
21. Use the following information to determine the value of River
Gardens' common stock:
Expected dividend payout ratio is 45 percent.
Expected dividend growth rate is 6.5 percent.
River Gardens' required return is 12.4 percent.
Expected earnings per share next year are $3.25.
A. $27.25. B. $24.80. C. $19.67.
22. All of the following factors affects the firm's P/E ratio
EXCEPT:
A. the expected interest rate on the bonds of the firm.
B. growth rates of dividends.
C. expected dividend payout ratio.
23. Assume that a firm has an expected dividend payout ratio of
20%, a required rate of return of 9% , and an expected dividend
growth of 5%. What is the firm's estimated price-to-earnings (P/E)
ratio?
A. 5.00. B. 10.00. C. 20.00.
24. All else equal, an increase in a company's growth rate will
most likely cause its P/E ratio to:
A. increase. B. not change. C. decrease.
25. Which of the following could be a growth stock?
A. Expected return = required return.
B. Expected return ＜ required return.
C. Expected return ＞ required return.
26. Which of the following statements about company and stock
analysis is least likely correct?
A. A growth stock always indicates a growth company.
B. A growth company's stock can have below-average risk-adjusted
returns.
C. A weak firm can experience temporary above-average riskadjusted return.
27. An analyst gathered the following financial information about
a firm:
Estimated EPS $10 per share
Dividend payout ratio 40%
Required rate of return 12%
Expected long-term growth rate of dividends 5%
What would the analyst's estimate of the value of this company's
stock be?
A. $33. B. $57. C. $80.
28. Which of the following statements about stock valuation is
least likely correct?
A. If estimated value ＜ the market price, buy the stock : it's
under priced.
B. If the expected rate of return ＞ the required rate, buy the
stock; it's under priced.
C. If the expected rate of return ＜ the required rate, don't buy
the stock; it's under priced.
29. Which of the following statement is least likely correct? A
speculative:
A. stock is usually under priced.
B. company has highly risky assets.
C. stocks have a slight probability of an enormous return.
30. An analyst gathered the following information about an
industry. The industry beta is 0.9. The industry profit margin is 8%,
the total asset turnover ratio is 1.5, and the leverage multiplier is
2. The dividend payout ratio of the industry is 50%. The risk-free
rate is 7% and the expected market return is 15%. The industry P/E is
closest to:
A. 12.00. B. 14.20. C. 22.73.
31. A defensive stock is best characterized as:
A. being heavily influenced by aggregate business activity.
B. generally retaining a large portion of earnings.
C. having low systematic risk.
(二)习题答案
1. C.
A growth company is a firm with the management ability and the
opportunities to make investments that yield rates of return greater
than the firm's required rate of return. A company following a
defensive competitive strategy attempts to position itself to deflect
the effect of the competitive forces in the industry. Examples may
include investment in fixed assets and technology to reduce its
production costs or increasing advertising budgets to establish a
strong brand image for products.
2. B.
Compounded Annual Sales Growth g% FV=220; PV=-128.4; N=7; I/Y= ?
g=8%.
2008 Sales = 2007 Sales×(1+g)=$220×1.08=$237.60 million.
2008 EPS = 2008 Sales × NPM/number of
Shares=$237.60×0.07/6=$2.77.
3. C.
Starting with the dividend discount model P0=D1/(ke-g), and
dividing both sides by E1 yields: P0/E1=(D1/E1)/(ke-g)
Thus, the P/E ratio is determined by:
The expected dividend payout ratio (D1/E1).
The required rate of return on the stock (ke).
The expected growth rate of dividends (g).
4. A.
When payout ratio increases, the P/E multiple increases only if
we assume that the growth rate will not change as a result.
5. B.
(24-22+0.60)/22=11.8%.
6. A.
Estimate earnings per share (EPS) as: [(sales per share)
(EBITDA %) - depreciation per share - interest per share] [1 - tax
rate ] = ($12.19×0.73-$6.21-$2.07)×(1-0.35)=$0.4022=$0.40.
7. C.
To increase P/E ratio, lower the retention ratio, lower k or
increase g. A lower beta would lead to a lower stock risk premium and
a lower k.
8. C.
P/E Ratio =0.60/(0.1289-0.0500)=7.60.
Required rate of return on equity will be 12.89 percent
=6.75%+1.17×(12.00%-6.75%).
9. A.
k =ER = Rf + Beta(RM - Rf) =0.06+1.2×(0.13-0.06)=0.144
Dividend payout ratio = 0.60
P/E = div payout/(k-g)=0.6/(0.144-0.07)=8.1
10. C.
P/E = D/E1/(k-g)
D/E1= Dividend payout ratio = 0.3
g=0.11
k=6+1.5×(14-6)=18%
P/E=0.3/(0.18-0.11)=0.3/0.07=4.29
11. B.
P/E=D/E1/(k-g)
D/E1= Dividend Payout Ratio = 0.45
k=0.15
g=0.10
P/E=0.45/(0.15-0.10)=0.45/0.05=9
12. C.
The risk free rate is a component of ke. ke can be represented by
the following: nominal risk free rate + stock risk premium, where
nominal risk free rate = [(1 + real risk free rate) × ( 1 + expected
inflation rate) ]-1. If the nominal risk free rate increases, ke will
increase. The spread between ke and g, or the P/E denominator, will
increase. P/E ratio will decrease. P/E = payout ratio/(ke-g).
13. A.
Earnings per share is [ (sales per share) ( EBITDA % ) depreciation per share - interest per share] [1 -tax rate] =
($9.29×0.65-$4.12-$1.26)×(1-0.43)=$0.3753=$0.38.
14. A.
Based upon the information, all we can say is that Mamford is a
growth company. The stock may be overpriced and not in a position to
grow. The problem gives no information concerning the cyclicality of
Mamford Industries.
15. B.
Sustainable Growth (g)=ROE × Earnings Retention Rate, or ROE ×
( 1 - Dividend Payout) ROE = Profit Margin x Total Asset Turnover x
Financial Leverage Multiplier = 0.10×0.75×2=0.15
g=0.15×0.45=0.0675, or 6.75%.
16. B.
Since Bareo Company's earnings are cyclical, the earnings
multiplier is reduced versus a company with a stable earnings profile.
17. A.
The P/E ratio is estimated as the dividend payout ratio divided
by the required return minus the growth rate. In this case,
0.50/(0.12-0.07)=10.00.
18. A.
P/E = dividend payout ratio/(k-g)
where g=( retention rate) (ROE) =(0)(ROE)=0
Dividend payout=1-retention ratio =1-0=1
P/E=1/(k-0)=1/k
19. A.
The expected inflation rate is a component of ke ( through the
nominal risk free rate), ke can be represented by the following:
nominal risk free rate + stock risk premium, where nominal risk free
rate = [ ( 1 + real risk free rate) ( 1 + expected inflation rate) ]
- 1. If the rate of inflation decreases, the nominal risk free rate
will decrease, ke will decrease. The spread between ke and g, or the
P/E denominator, will decrease. P/E ratio will increase.
2O. C.
The P/E ratio is determined by payout ratio D/E, required return
Ke, and expected growth g.
21. B.
First, estimate the price to earnings (P/E) ratio as:
(0.45)/(0.124-0.065)=7.63. Then, multiply the expected earnings by
the estimated P/E ratio: $3.25×7.63=$24.80.
22. A.
The factors that affect the P/E ratio are the same factors that
affect the value of a firm in the infinite growth dividend discount
model. The expected interest rate on the bonds is not a significant
factor affecting the P/E ratio.
23. A.
The price-to-earnings (P/E) ratio is equal to (D1/E1)/(kg)=0.2/(0.09-0.05)=5.00.
24. A.
Increase in g: As g increases, the spread between ke and g, or
the P/E denominator, will decrease, and the P/E ratio will increase.
25. C.
If the required return is less than the expected return, the
stock is underpriced and should temporarily earn above-normal riskadjusted returns.
26. A.
Classifying a stock as a growth stock means it is expected to
earn above-average risk-adjusted returns, regardless of whether it is
issued by a strong or weak firm.
27. B.
(P/E)1=(D1/E1)/(k-g)=0.4/(0.12-0.05)=5.7
P1=$10×5.7=$57
28. A.
Buy (sell) a stock when the estimated value is more (less) than
the market price.
29. A.
Speculative stocks are almost always overpriced.
30. C.
Using the CAPM: ki =7%+0.9×(0.15-0.07)=14.2%.
Using the DuPont equation: ROE =8%×1.5×2=24%.
g = retention ratio = ROE=0.50×24%=12%.
P/E=0.5/(0.142-0.12)=22.73.
31. C.
Systematic risk is measured by a stock's beta; this stock's beta
would be less than 1.
59. Introduction to Price Multiples
(一)强化习题
1. Peter Welsh, CFA, gathered the following information from a
company's most recent financial statements ( U.S. $ in millions):
Preferred stock
40
Common stock
120
Additional paid-in capital
30
Retained earnings
190
Treasury stock
(55)
Total shareholders' equity
325
Total number of common shares
10 million
outstanding
Tax rate
40%
Welsh also determined that the company uses the LIFO inventory
method, but most companies in the industry use the FIFO method. The
footnotes to the financial statements indicate that if the company
had used the FIFO method, the inventory balance would have been $ 50
million higher than the amount reported on the company's most recent
financial statements. If the company's common stock is currently
selling for $70 per share, the most appropriate price to book value
ratio to use in valuing the company is:
A. 2.22. B. 2.03. C. 2.16.
2. Current dividend per share ( Do) paid on the company common
stock $5.00
Required rate of return on the company common stock 15.5%
Expected constant growth rate in earnings and dividends 7.5%
The value of a share of the company's stock and the leading
price/earnings (P/E) ratio, respectively, are closest to:
Value of stock Leading P/E ration
①A. $40.13 7.5
②B. $67.19 8.0
③C. $67.19 7.5
A. ①B. ②C. ③
3. The price to book value ratio (P/BV) is a helpful valuation
technique when examining firms:
A. with the same stock prices.
B. with different production methods.
C. that hold primarily liquid assets.
4. An increase in a firm's stock price will, all else equal,
cause the price to cash flow (P/CF) ratio to:
A. decrease. B. remain the same. C. increase.
5. General, Inc. , has net income of $ 650000 and one million
shares outstanding. The profit margin is 6 percent and General, Inc. ,
is selling for $ 30. 00. The price/sales ratio is equal to:
A. 2.77. B. 10.83. C. 0.06.
6. Most of the differences among companies with respect to
quality of earnings are addressed when companies are compared using:
A. price to cash flow ratios but not price to earnings ratios.
B. price to earnings ratios but not price to cash flow ratios.
C. either price to cash flow ratios or price to earnings ratios.
7. Which of the following accounting variables is least likely to
be manipulated?
A. Net income. B. Depreciation expense. C. Sales.
8. Given the following information, compute price/sales.
Book value of assets = $550000
Total sales = $200000
Net income = $20000
Dividend payout ratio = 30%
Operating cash flow = $40000
Price per share = $100
Shares outstanding = 1000
Book value of liabilities = $500000
A. 2.00X. B. 2.50X. C. 0.50X.
9. Which of the following is a disadvantage of using price-tosales (P/S) multiples in stock valuations?
A. P/S multiples are more volatile than P/E multiples.
B. The use of P/S multiples can miss problems associated with
cost control.
C. P/S multiples are not available for all firms, unlike the P/E
ratio.
10. All of the following are advantages of using price/sales (P/S)
multiple EXCEPT:
A. Sales figures are not as easy to manipulate as earnings and
book value, which are significantly affected by accounting
conventions.
B. P/S multiples are more reliable because sales data cannot be
distorted by management.
C. P/S multiples provide a meaningful framework for evaluating
distressed firms.
11. One disadvantage of using the price/sales (P/S) multiple for
stock valuation is that:
A. profit margins are not stable over time.
B. profit margins are not consistent across firms within an
industry.
C. sales are relatively stable and might not change even though
earnings and value might change significantly.
12. An argument against using the price to cash flow (P/CF)
valuation approach is that:
A. cash flows are not as easy to manipulate or distort as EPS and
book value.
B. non-cash revenue and net changes in working capital are
ignored when using earnings per share (EPS) plus non-cash charges as
an estimate.
C. price to cash flow ratios are not as volatile as price-toearnings (P/E) multiples.
13. The current price of XYZ Inc. is $40 per share with 1000
shares of equity outstanding. Sales are $ 4000 and the book value of
the firm is $ 10000. What is the price/sales ratio of XYZ Inc. ?
A. 0.010. B. 10.000. C. 4.000.
14. Which of the following is NOT an advantage of using price-tobook value multiples in stock valuation?
A. Book value provides a relatively stable, intuitive measure of
value.
B. P/B ratios can be compared across similar firms if accounting
standards are consistent.
C. Book values are very meaningful for firms in service
industries.
15. One advantage of using price-to-book value multiples for
stock valuation is that:
A. most of the time it is close to the market value.
B. it is a stable and simple benchmark for comparison to the
market price.
C. accounting standards for assets are always consistent across
firms.
16. One advantage of price/sales (P/S) multiples over price to
earnings (P/E) and price-to-book value (PBV) multiples is that :
A. P/S can be used for distressed firms.
B. Regression shows a strong relationship between stock prices
and sales.
C. P/S is more volatile than P/E multiples and, therefore, more
reliable for use in valuation.
17. Suppose a stock has a dividend payout ratio of 40 percent, a
required rate of return of 15 percent and an expected growth rate of
dividends of 10 percent. What is the P/E ratio of the stock?
A. 2.667. B. 1.5. C. 8.0.
18. Dot-com companies are often valued by applying the ______
ratio.
A. Price/Sales.
B. Price/Earnings.
C. Price/Cash Flow.
19. All of the following variables affect the price-to-cash flow
ratio EXCEPT:
A. dividend rate. B. depreciation rate. C. growth rate.
20. Bill Yates, CFA, is evaluating NanoSoft, Inc. , a high tech
company with impressive sales growth but no earnings. Yates'
supervisor, a firm believer in relative valuation, instructs him to
use the price-to-sales multiple to determine the value of NanoSoft.
In an e-mail to his supervisor, Yates weighs the pros and cons of the
price-to-sales multiple. All of his statements about price-to-sales
ratios are correct EXCEPT:
A. profit margin is a key variable not considered.
B. price-to-sales is a poor valuation technique for growth
companies.
C. sales growth drives all subsequent earnings and cash flows.
21. All of the following statements are true about the price-tosales ratio EXCEPT:
A. users of the ratio believe that sales information is subject
to less manipulation than any other data item.
B. price-to-sales ratio is fairly constant by industry.
C. advocates of the ratio believe that strong sales growth is a
requirement for a growth company.
22. All of the following are drawbacks to using price-to-book
value (P/BV) as a valuation technique EXCEPT:
A. P/BV valuation may give a misleading comparison of different
types of business models.
B. P/BV is an unstable measure of valuation.
C. P/BV valuation does not adequately account for the positive
impact of R&D expenditures.
(二)习题答案
1. A.
P/B ratio = market value of equity/book value of equity = P/book
value per share =70/[325-40+50×(1-40% )]/10=2.22. Book value of
equity = common shareholder's equity = (total assets - total
liability) - preferred stock.
2. C.
The constant growth dividend model and the earnings multiplier
model will result in the same value for a share of stock. Using the
constant growth model the value is ($5.00) (1.075) or $5.375 divided
by the required rate of return minus the growth rate:
$5.375/0.08=$67.188. The earnings multiplier is the dividend payout
ratio divided by the required rate of return minus the growth rate:
0.6/0.08=7.5.
3. C.
P/BV analysis works best for firms that hold primarily liquid
assets.
4. C.
An increase in a firm's stock price will, everything else being
equal (i. e. the CF does not change), cause the P/CF ratio to
increase.
5. A.
6% profit margin = $650000/x; x(sales) = $10833333.
Sales per share = $10.83m/1000000 = $10.83 per share.
P/Sales =$30.00/$10.83=2.77.
6. A.
Most quality of earnings differences between companies (use of
aggressive versus conservative accounting methods) are not likely to
be a problem when using P/CF ratios, but are a problem when using P/E
ratios.
7. C.
Sales is the accounting variable considered least likely to be
manipulated.
8. C.
Market value of equity = $100×1000=$100000
Price/Sales = $100000/$200000=0.50X
9. B.
Due to the stability of using sales relative to earnings in the
price-to-sales (P/S) multiple, an analyst may miss problems of
troubled firms concerning its cost control. P/S multiples are
actually less volatile than P/E ratios, which is an advantage in
using the PS multiple. Another advantage is that P/S ratios are
available for all firms, including distressed firms, which is not
necessarily the case for P/E multiples.
10. B.
Accounting data on sales is used to calculate the P/S multiple.
The P/S multiple is thought to be more reliable only because sales
figures are not as easy to manipulate as the earnings and book value,
both of which are significantly affected by accounting conventions.
11. C.
The stability of sales (relative to earnings and book value) can
be a disadvantage. For example, revenues may remain stable but
earnings and book values can drop significantly due to a sharp
increase in expenses.
12. B.
Items affecting actual cash flow from operations are ignored when
the EPS plus non-cash charges estimate is used. For example, non-cash
revenue and net changes in working capital are ignored. The other
responses are arguments in favor of using the price to cash flow
approach.
13. B.
The price/sales ratio is (price per share)/(sales per
share)=(40)/(4000/1000)=10.0.
14. C.
Book values are not very meaningful for firms in service
industries.
15. B.
Book value provides a relatively stable measure of value that can
be compared to the market price. For investors who mistrust the
discounted cash flow estimates of value, it provides a much simpler
benchmark for comparison. Book value may or may not be closer to the
market value, and accounting standards for assets also vary from firm
to firm (At times, firms may use different methods for accounting
depreciation. ).
16. A.
Unlike the PBV and P/E multiples, which can become negative and
not meaningful, the price/sales multiple is meaningful even for
distressed firms ( that may have negative earnings or book value).
17. C.
The P/E ratio is computed as 0.40/(0.15-0.10)=8.0.
18. A.
Since dot-corn companies frequently have negative earnings and
cash flows, they are often valued using a multiple of sales.
19. A.
Including dividends and capital expenditures would be free cash
flow. Normally cash flow from operations is used in price-to-cash
flow ratios. Dividends do not affect the calculation.
20. B.
Price-to-sales is acceptable for evaluating growth companies, and
can be superior to other measures when earnings are negative or
nonexistent.
21. B.
It is important to view margins and growth gates together when
using price to sales analysis. Price-to-sales ratios can vary
dramatically by industry.
22. B.
P/BV is a relatively stable measure of valuation compared to
others (e. g. P/E).