Reading 44: Market-Based Valuation: Price and Enterprise Val 2011, function, whether, Robert, center

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Session 12: Equity Investments: Valuation Models
Reading 44: Market-Based Valuation: Price and Enterprise Value Multiples

LOS r: Evaluate whether a stock is overvalued, fairly valued, or undervalued based on comparisons of multiples.

 

 

At a CFA society function, Robert Chan comments to Li Chiao that Xanedu Industries’ expected dividend growth rate is 5.5%, dividend payout ratio (g) is 40%, and required return on equity (r) is 12%. Based on a justified leading P/E ratio compared to a market P/E ratio of 8.0, Xanedu Industries is most likely:

A) undervalued.

B) correctly valued.

C) overvalued.

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Justified Leading P/E = payout ratio / (r ? g). When the expected dividend growth is 5.5%, the justified leading P/E = 0.40 / (0.12 ? 0.055) = 6.15. This is less than the market P/E of 8.0.

[此贴子已经被作者于2011-3-21 11:37:07编辑过]

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Robert Chan comments to Leslie Singer that Converted Industries’ expected dividend growth rate is 5.0%, dividend payout ratio (g) is 45%, and required return on equity (r) is 10%. Based on a justified trailing P/E ratio compared to a trailing market P/E ratio of 9.0, Converted Industries is most likely:

A) overvalued.

B) undervalued.

C) correctly valued.

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Justified trailing P/E = payout ratio * (1 + g) / (r ? g). When the expected dividend growth is 5.0%, the justified trailing P/E = 0.45 * (1 + 0.05) / (0.10 ? 0.05) = 9.45. This is greater than the market P/E of 9.0.

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Leslie Singer comments to Robert Chan that Dreamtime Industries’ expected dividend growth rate is 5.0%, ROE is 14%, and required return on equity (r) is 10%. Based on a justified P/B ratio compared to a P/B ratio (based on market price per share) of 1.60, Dreamtime Industries is most likely:

A) overvalued.

B) undervalued.

C) correctly valued.

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Justified P/B = (ROE ? g) / (r ? g). When the expected dividend growth is 5.0%, the justified P/B = (0.14 ? 0.05) / (0.10 ? 0.05) = 1.80. This is greater than the market P/B of 1.60.