Reading 59 Company Analysis and Stock Selection - LOS b ～ style, market, return, expected

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1.Given a beta of 1.55 and a risk-ree rate of 8%, what is the expected rate of return, assuming a 14% market return?

A)   12.4%.

B)   20.4%.

C)   14.3%.

D)   17.3%.

2.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.

D)   5.56.

3.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.

D)   11.0 times.

4.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.

D)   Investors become less risk averse.

5.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.

D)   $0.47.

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答案和详解如下：

1.Given a beta of 1.55 and a risk-ree rate of 8%, what is the expected rate of return, assuming a 14% market return?

A)   12.4%.

B)   20.4%.

C)   14.3%.

D)   17.3%.

The correct answer was D)   

k = 8 + 1.55(14-8)
= 8 + 1.55(6)
= 8 + 9.3
= 17.3

2.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.

D)   5.56.

The correct answer was 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

3.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.

D)   11.0 times.

The correct answer was B)

P/E = D/E₁/ (k - g)
D/E₁ = Dividend Payout Ratio = .45
k = .15
g = .10
P/E = .45 / (.15 - .10) 
= .45 / .05 = 9

4.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.

D)   Investors become less risk averse.

The correct answer was C)

Increase in the T-bill (or nominal risk-free) rate. The risk free rate is a component of k_e. k_e 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,

  k_e will increase.

  The spread between k_e and g, or the P/E denominator, will increase.

  P/E ratio will decrease.

  P/E = payout ratio / (k_e – g)

5.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.

D)   $0.47.

The correct answer was 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.

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